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* BoE says to target rapid growth in mortgages or loans * Slow lending market suggests any action a long way off * Mortgage industry reacts cautiously to announcement By Huw Jones and David Milliken LONDON, Jan 14 (Reuters) - British banks offering large homeloans that risk fuelling a future housing boom will have to holdextra capital to keep the financial system safe, the Bank ofEngland said on Monday. Britain's weak economy makes a credit boom look a distantprospect for now, but the central bank and the country'slawmakers are already putting in place new rules to stop lendingdestabilising the economy in future. Prior to the crash, many British lenders offered mortgagescovering almost all the value of the property, while in somecases borrowers were not required to provide evidence of theirability to replay the loans. These practices catered for an almost obsessive demand byBritons to own their own homes. The FPC stopped short of asking for powers to directlyregulate how much of a deposit home buyers should put down,saying more debate was needed on this politically sensitivestep. Starting in April, the central bank's Financial PolicyCommittee (FPC) will get broad powers to regulate how muchcredit is flowing into the economy and to clamp down onpotentially destabilising hotspots in sectors such as property. On Monday the FPC said more about how these powers wouldwork in practice, and what warning signs it would look forbefore it orders banks to top up capital buffers so that theyhave enough reserves to mop up losses on soured loans in future. The tougher rules might slow growth during a future creditexpansion, the FPC said, but it insisted they would bringlong-term benefits by reducing the chance of another financialcrisis which could require taxpayers to shore up banks. Britain's economy shrank more than 6 percent in a 2008-09financial crisis and has yet to make up the lost ground, whileits national debt has ballooned by tens of billions of pounds asa result of the cost of bank bailouts and a shrunken economy. "If these tools are successful in reducing the likelihoodand severity of financial crises, their use is likely to boostthe expected level of UK GDP," the Bank of England said. "Thebest available studies point... towards only a modest negativeimpact on near-term growth if (capital rules) are tightened." The impact on growth would be lessened by the fact thattighter credit conditions would bear down on inflation, allowingthe BoE's Monetary Policy Committee to keep interest rates lowerthan they would be otherwise, the FPC said. Britain's Council of Mortgage Lenders, a trade body forfirms offering home loans, reacted cautiously to theannouncement and said it would examine the plans to make surethey did not create any inadvertent barriers to home purchase. REGULATORY SHAKE-UP The FPC is part of a wider shake-up of Britain's financialsupervisory system which is being formally launched in April,when the committee's power to require banks to hold extracapital to cover specific sectors like property takes effect. The power to force banks to top up their capital because oftoo much credit in general will not be available until a newEuropean Union law on bank capital requirements comes intoforce. Negotiations on the law point to a 2014 start. It may be some time before the FPC feels a need to tightenrules, however. Current mortgage approval levels are far below those seenbefore the financial crisis unfolded in 2007-2008, and in Augustthe BoE launched a Funding for Lending Scheme aimed at boostinglending to home-buyers and businesses. Nonetheless, property booms and busts have been behind manyof Britain's economic downturns in past decades, andpolicymakers have warned that it would be politically untenablefor Britons to have to bail out their banks again. The FPC set it would keep tabs on ratios of house prices andcommercial property prices to rents, how large a deposit newborrowers needed as well as broader measures of how rapidlybanks were increasing credit to other areas such as derivatives. However Mat Oakley, director of commercial research atproperty broker Savills, said the FPC might not spotwarning signs early enough if it looks mostly at indicators likeproperty prices, rents and yields. "It's going in the right direction, though... I don't thinkit will ever be possible to rule out a future property boom,"Oakley said. All banks, building societies and large investment firms whoare based or operate subsidiaries in Britain will come under theFPC's scope, but some foreign bank branches will not be covered. The FPC said it would monitor for "leakages" and recommendgovernment action to close loopholes if needed. But EU law maylimit Britain's ability to act in some cases.