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By Huw Jones and David Milliken
LONDON, Dec 1 (Reuters) - The Bank of England set out planson Tuesday to require banks to hold as much as 10 billion pounds($15.1 billion) extra capital as the credit cycle moves into amore normal phase, but stopped short of immediate action.
The central bank said credit conditions in Britain hadlargely recovered from the financial crisis as banks began tolend more freely, and warned that asset prices were vulnerableto a big rise in interest rates and emerging market risks.
"Following the global financial crisis, there was a periodof heightened risk aversion and retrenchment from risk-taking,"the BoE said. "The system has now moved out of that period."
The central bank said it now expected banks to hold aso-called counter-cyclical capital buffer (CCB) of 1 percentduring normal times, and was in the process of tweakingbank-specific requirements with a view to impose thisstep-by-step from March.
The CCB aims to rein in risky lending at frothier stages ofthe credit cycle. It stands at zero currently, but the BoE hasalready required some banks to hold extra capital due tofirm-specific risks. Some economists and banking analysts hadexpected the BoE to raise the CCB this month to 0.5 percent.
The BoE also said it expected the banking sector as a wholeto hold high-grade tier one equity capital of 13.5 percent ofrisk-weighted assets by 2019, up from 13 percent now -- part ofwhich would overlap with the capital required for the CCB.
The BoE has said it wanted to give banks more clarity aboutits long-run aims for the amount of capital they hold, now thatcredit conditions had largely got back to normal. Banks havecomplained that in the past, the BoE has unexpectedly piled onextra capital requirements, making it hard for them to lend ordecide which lines of business to stay in.
Alongside its half-yearly Financial Stability Report, theBoE also released the results of annual 'stress tests' into howlenders would deal with unexpected economic shocks.
This year the focus was on emerging market and tradingrisks, and Royal Bank of Scotland and Standard Chartered both only passed thanks to steps they took to improvetheir capital ratios mid-way through the testing process.
The other five big lenders tested -- HSBC, Barclays, Lloyds Banking Group, Santander andNationwide -- did not have to take action.
Asset managers will face tests next year of how they woulddeal with investors pulling out their money en masse.
HIGHER RATE RISK
The BoE Financial Policy Committee's report comes as marketsbrace for the United States to raise interest rates later thismonth for the first time since the financial crisis.
"Financial market prices remain vulnerable to a sharpincrease in market interest rates or the compensation demandedby investors for risky assets," the report said.
With the BoE's Monetary Policy Committee unlikely to raiseBritish interest rates until later next year, the FPC is havingto take other steps to guard against risky behaviour.
Even if domestic cost pressures are too weak to warrant arate rise, British consumer and mortgage lending is growing atits fastest rate since the financial crisis.
So-called buy-to-let mortgages -- which enable smalllandlords to purchase property to rent out -- showed weakerunderwriting standards than residential mortgages and the BoE'sPrudential Regulation Authority said it was examining this.
The FPC said it still stood ready to take action if neededand would monitor closely the impact of higher propertytransaction taxes for buy-to-let which finance minister GeorgeOsborne announced last week and will take effect next April.
The BoE also said a recent narrowing in Britain's bigcurrent account deficit was likely to be temporary, and thatvulnerabilities could build quickly. ($1 = 0.6626 British Pounds)
