UPDATE 1-UK's Osborne urges BoE bank regulators to focus on recovery

Tue Apr 30, 2013 8:35am EDT

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By David Milliken and Christina Fincher

LONDON, April 30 (Reuters) - A new Bank of England body to regulate Britain's financial system should ensure it does not impede an economic recovery while it works for longer-term stability, finance minister George Osborne said on Tuesday.

The Financial Policy Committee has operated on an interim basis since June 2011, and some bankers have criticised its push for lenders to hold more capital, which they say reduces their ability to provide credit to British firms and households.

Setting out the first remit for the FPC since it gained formal powers on April 1, Osborne wrote in a letter to Bank of England Governor Mervyn King that the body should consider short-term growth as well as longer-term financial stability.

"It is particularly important, at this stage of the cycle, that the Committee takes into account, and gives due weight to, the impact of its actions on the near-term economic recovery," Osborne wrote. He said there were "short-term trade-offs" between sustaining growth and addressing risk.

King has argued that higher capital levels do not reduce banks' ability to lend, and instead help the economy by reducing the risk premium banks pay to borrow and by bolstering general confidence in the financial system.

Regulators across the world are under pressure to ease tough new regimes as banks complain they cannot lend to the economy and build up capital buffers to high levels at the same time. Earlier this year global regulators gave banks an extra three years to put in place cash reserves that will help them to withstand short-term market shocks unaided.

The FPC has already shown some flexibility by allowing British banks to scale back their very high cash buffers if the money freed up is lent to businesses and other parts of Britain's struggling economy.

But it has not yielded on longer-term capital. Last month it ordered banks to plug a capital hole of 25 billion pounds ($38.7 billion) by the end of this year, insisting this will be "manageable" and that the banks that have kept lending were the best capitalised ones.

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