HIGHLIGHTS-Bank of England discusses financial stability in parliament

LONDON, July 2 (Reuters) - Following are highlights ofremarks made by Bank of England policymakers at a hearing beforeparliament's Treasury Committee to explain its half-yearlyFinancial Stability Report.

Appearing before the committee are Paul Tucker, deputygovernor for financial stability, Andrew Bailey, chief executiveof the BoE's Prudential Regulation Authority, and FinancialPolicy Committee external members Don Kohn and Martin Taylor.

BAILEY ON COOP AND LLOYDS

"We said all along that Coop were not in a position, at thattime, to proceeder, and the reason I wanted that to be made veryclear to Lloyds was that I did not want a situation where thething failed to happen and Lloyds turned round to us and said'well, if only you'd told us'."

"So, although it was slightly unusual in our practice to dothis, I was very insistent that Lloyds were told for that veryreason, that there was a reasonable probability that this wasnot going to happen."

BAILEY ON COOP BANK

"Towards the end of 2011, we made it clear to them that, andI'll use these words carefully, that it was not clear to us thatCoop Banking Group had the ability to transform itselfsuccessfully and sustainably into an organisation on the scalethat would result from acquiring the Verde assets.

"And then we set out five areas that they would have to dealwith. Capital, liquidity and risk management, integration,governance and management. I mean, that's obviously a prettyfull set.

"I made it clear to them, at that point, this is the tailend of 2011, that they had to make that clear to Lloyds."

BAILEY ON WHETHER BANKS CAN INCREASE LENDING

"The answer they give is, they are increasing their capacityto make lending, and my answer to that is, that's good but Ithink the jury is very much out on this. I mean, we have to seethe evidence on this. "

BAILEY ON FLS LENDING FORECAST

"The projection now, and I'll break it down a little bit,looks more positive than we had before and I would say there area number of features to that."

"First of all what we have seen very markedly in the lastyear is a reduction in funding costs, and I would say that hasbeen the major achievement to date in the funding for lendingscheme."

"The projections the banks now have do show stronger lendingacross both the mort gate sector and the small and medium sizedfirms sector in the projections looking ahead."

TUCKER ON LONG-TERM MORTGAGE SUBSIDY

"As we made clear, I hope, we don't think it's wise in themedium to long term at all. This country has had a successfulhousing market without a government subsidy."

TUCKER ON HOUSEHOLD DEBT

"What we are trying to bring about is circumstances that theeconomy recovers with price stability and the debt burden onhouseholds is, as a whole, manageable. But this is a headwindand one of the reasons why we have such loose monetary policy."

KOHN ON SEARCH FOR YIELD

"It is perfectly reasonable to think that the actualtightening exercise, the raising of interest rates, is quitesome distance off."

TUCKER ON MARKET REACTION TO FED COMMENTS

"We need to be on our mettle, not just in this country butour colleagues around the world, so there's a warning shotacross out bows on this...I don't want to create the impressionthat we think that we're on the edge of a cliff."

TUCKER ON NEED TO ENSURE COMPLIANCE WITH RULES

"There are efforts in Basel to address precisely this. Thereis an acute awareness in, around the top table in Basel amongstthe governors, that it is not enough just to issue standards andthen they get implemented in different ways around the world.

"And speaking now as a member of the Financial StabilityBoard Steering Committee, almost the biggest change that isoccurring, whether it is about banks or central counterpartiesor other things, is we now want to know that there is truecompliance with the standards around the world and in broadlyequivalent ways."

TUCKER ON APPLYING 3 PCT LEVERAGE GOAL NOW

"Yes, I think it's right, speaking both as a FPC member andas a PRA board member, and I have to say, as an MPC member aswell."

BAILEY ON CAPITAL AND LEVERAGE GOALS

"We want firms to get there wherever possible, and for thelarge majority of actions to be taken by the end of this year.We've said that some will go into next year, but the target hasbeen to get the institutions on risk-based capital to where wewant them to be, based on the some of the Basel end pointsmeasure at the end of this year."

"Now there is a logic then to saying you're also picking upthe leverage question. You know, why would you take a differentview to that on timing. So there is a presumption startingthere."

"But actually what we have said, and to be very clear onthis, because this is what we are doing at the moment, is wehave said to the institutions (on leverage): 'Will you pleasegive us plans as to how you think and would intend to achievethe target we have set? ... bearing in mind a presumption thatwe do want this to happen as soon as possible."

BAILEY ON LOBBYING

"We are certainly aware that there are conversations thathappened between the banks and officials and ministers...Thething that concerns me is that we are trying to build frankly atransparent process that has accountability in it."

"Because I am very clear that the failures of past regimesin part, but not in whole, have root in the lack ofaccountability, so we want this process to be transparent. And Idon't think it's helpful if there is a large amount of activitythat is private to that which is seeking to influence outcomes.

"I've not been approached by any minister on this question.I was aware, I was made aware, that there were conversationsgoing on with the Treasury. They made it clear to meet that theyregard the PRA as an independent regulator and they were notseeking to intervene on this question with me. But they did makeit clear that those conversations had occurred." (Reporting by Li-mei Hoang and Adam Jourdan)