UPDATE 1-Bank of England's external financial regulators fret over growth

Tue Jun 4, 2013 9:50am EDT

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By Huw Jones

LONDON, June 4 (Reuters) - The three new external members of the Bank of England's financial risk watchdog expressed concern on Tuesday about striking the right balance between regulation and growth.

The Financial Policy Committee was launched in 2011 as an early warning system for spotting economic risks, plugging a supervisory gap highlighted by the 2007-2009 financial crisis. It has powers to make recommendations and direct commercial banks to hold more capital.

Clara Furse, Richard Sharp and Martin Taylor referred to finding the right trade-off between tough regulation and growth - something often played down by staff at the central bank.

"There are signs of a modest economic recovery and I think it's important that what the FPC does does not undermine that recovery," Furse told parliament's Treasury Select Committee.

Ensuring financial stability was not an end in itself but a way of fostering sustainable growth, added Furse, a former chief executive of the London Stock Exchange.

"The idea of trying to strike the right balance seems to be uncontroversial, though not everyone will agree, perhaps, on where it should be struck," Taylor said.

Forcing banks to hold more capital would not hinder them from lending to the economy, he added.

"We haven't yet repaired all the legacy issues of the crisis and we need to get that thoroughly done," Taylor said.

The new FPC members were named by UK finance minister George Osborne, who this year added economic growth to the committee's core financial stability remit as Britain struggles to secure a sustained recovery.

Lawmakers questioned the independence of the new FPC members, saying they could be seen as Osborne's people and not willing to take action that could dampen activity.

"I am independent," Furse said in at times testy exchanges.

She was also challenged over her role as a non-executive director of Benelux bank Fortis when it was rescued by taxpayers after a botched acquisition during the financial crisis.

She "deeply regretted" the losses suffered by shareholders. "I think it's relevant experience. It sensitises me to all sorts of extreme risk in a way I think might be quite useful."

Sharp was asked if his donation to Britain's ruling Conservative Party made him less independent but the former Goldman Sachs banker said there was no evidence of this.

The three new members will take part in their first FPC meeting on June 18, with its outcome published on June 26.

LEVERAGE POWER

Both Sharp and Taylor said it would be useful for the FPC to have the power to cap bank balance sheets or leverage, something Britain's government has so far denied the supervisory body.

Sharp said the simplicity of a leverage ratio was important but not an absolute requirement for now, while Taylor said not having the power was a major weakness at the FPC.

Lawmakers believe such a tool would stop banks getting too big after Britain had to shore up the sector in the crisis. A cap is being introduced internationally from 2015 but lawmakers want to move earlier.

Taylor raised eyebrows by saying he "could not get excited" about banks "low-balling" or submitting artificially low Libor interest rate quotes during the financial crisis.

"It seems to be a help to financial stability rather than a hindrance," Taylor said, but stressed that manipulating Libor to make money on derivatives was a very serious offence.

UK banks RBS and Barclays were fined for rigging Libor and Taylor said it would be no surprise if lenders were hit by more penalties over misconduct.

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