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By Huw Jones
LONDON, March 9 (Reuters) - Britain's top banking regulatorhas dismissed critics who say risks at banks cannot be fullyunderstood and therefore lenders must hold far more capital.
Andrew Bailey, who heads the BoE's Prudential RegulationAuthority which supervises Lloyds, Barclays, HSBC, RBS and otherlenders, said the best approach was the current mix of capitalbuffers, proper risk management, supervision, and tools forwinding down a bank when in trouble.
"I do not accept the proposition that we can only abandonall hope of understanding the risks in banks," Bailey said in aspeech at a banking event hosted by Barclays on Wednesday.
"Likewise, I do not agree that large banks areunsupervisable and ungovernable. I simply do not believe thatthe alternative approaches are sufficiently credible."
The debate over capital has flared up in recent weeks asshares in lenders across Europe have come under pressure, withinvestors questioning how banks can make money when interestrates are falling into negative territory.
Bailey, also deputy governor of the Bank of England (BoE),said he disagreed with the "big equity school" which argueslenders should hold capital equivalent to 20 percent or more.
He is the latest senior BoE official to dismiss criticismfrom John Vickers that lenders don't hold enough capital.Vickers is the architect of a reform that will force lenders to"ring fence" their retail arms with more capital from 2019.
Bailey, who takes up his new job as chief executive of theFinancial Conduct Authority in the summer, said it would take 90years for banks to build up their buffers to 20 percent of theirbalance sheets.
"I do not therefore see 'big equity' as a sustainablesolution because this sort of proposal is just not practical,"Bailey said.
He rejected the "narrow banking" model of deposit-takingarms only being allowed to hold low risk bonds as it wouldprompt risks to shift to "shadow" banks.
The BoE's executive director for financial stability AlexBrazier said this week that Britain's banks are within a "hair'sbreadth" of reaching the core capital target of 13.5 percent setby the central bank, above international norms. (Editing by Elaine Hardcastle)
