UK regulator defends tough bank capital rules

LONDON, May 1 (Reuters) - Britain's top banking regulatordefended his tough rules, saying strong capital buffers were apre-condition for keeping the economy supplied with credit.

Andrew Bailey was speaking after the UK government urged theBank of England's risk watchdog, on which Bailey sits, to ensureregulation does not impede recovery.

Banks complain it is difficult for them to keep lending tobusinesses and households when the BoE's Prudential RegulationAuthority, headed by Bailey, is asking them to plug a 25 billionpound capital hole by year-end.

"We see evidence today of better capitalised banks tendingto see more rapid growth in lending," Bailey told a dinner atthe Chartered Institute of Bankers in Edinburgh.

Balance sheet strength is a necessary pre-condition ofstronger lending to the economy as a whole, he said.

"At present the Bank of England is pursuing two importantobjectives: seeking to increase the resilience of the UK bankingsystem and supporting the creation of credit in the UK economy."

Last week the central bank retooled its Funding for LendingScheme designed to improve the supply of credit to the economy.

"We cannot say that this will conclusively deal with thequestion of whether the problem is a lack of loan supply ordemand, but we can say that we have used our toolkit to create abig incentive for banks to lend to small firms," Bailey said.

It will also require a "very strong culture" for regulatorsto rein in banks to keep the financial system stable when thegood times return.

"The record of the past indicates that the temptation to'let the good times roll' is deeply embedded in the politicaleconomy of regulation," Bailey said.