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By William Schomberg and Andy Bruce
LONDON, Oct 1 (Reuters) - The Bank of England has signalledthat it might raise for the first time the amount of capitalthat banks must set aside as extra protection against risks fromfuture crises, saying lending was picking up as Britain'seconomy recovers.
The Bank's Financial Policy Committee discussed thepossibility of raising the countercyclical capital buffer (CCB),which has been set at zero since its introduction in 2013, insmaller increments, according to minutes of a meeting last week.
"Given the challenging outlook for financial stability,with modest but rising credit growth and indicators that somedomestic risks were beginning to re-emerge, it could be arguedthat the system was moving into a more normal phase of thecredit cycle," the minutes, released on Thursday, said.
"That should be reflected in the Committee's considerationof the appropriate CCB rate."
The BoE, along with central banks in other advancedeconomies, has overhauled the rules for the financial sector inthe hope of preventing the kind of build-up of risks that causedthe global financial crisis in 2007-09.
The CCB represents a extra level of protection on top ofother requirements for lenders to set capital aside. The bufferis supposed to help banks build up a cushion of capital inperiods of economic normality to make them less exposed tocrises in the future.
The FPC said it was awaiting the results of this year'sstress tests of Britain's biggest lenders, due to be publishedon Dec. 1, to gauge the robustness of the financial sector.
"The Committee noted that decisions regarding the CCB mighthave implications for existing firm-specific capital buffers, tothe extent that these took cyclical risks into account," therecord of last week's meeting said.
Thursday's statement is the clearest sign yet of how the BoEintends to use the stress tests as an ongoing supervisory toolto determine current and future capital levels at banks.
The FPC also said there was "potential for material impacton UK financial stability" due to the country's direct andindirect links to emerging markets including China.
"Though risk had begun to be repriced, members judged thatmarket prices might not yet sufficiently be factoring in thepotential for a deterioration in liquidity conditions givenchanges in market functioning and elevated tail risks related to(emerging markets)," the minutes said. (Additional reporting by Huw Jones; Writing by WilliamSchomberg; Editing by Catherine Evans)
