UPDATE 1-Bank of England considered bank capital buffer hike but waiting to watch risks

By William Schomberg and Andrew MacAskill LONDON, March 27 (Reuters) - The Bank of England said itconsidered this month increasing the amount of money banks mustset aside to counter their risks as lending in Britain grows,but it held off taking a decision until June. The BoE said on Tuesday its Financial Policy Committee,which oversees risks to the economy from the banking system, hadseen arguments for setting the so-called countercyclical capitalbuffer (CCyB) a little above its current level of 1 percent of abank's risk-weighted assets. "Risks had increased since the Committee first judged that a1 percent UK CCyB rate was appropriate, in Q1 2016," the BoEsaid in a series of minutes from the FPC's meeting on March 12. Although British economic growth slowed last year followingthe 2016 vote to leave the European Union, it held up betterthan the BoE and most economists had expected. A Brexittransition deal struck by London and Brussels earlier this monthhas further eased short-term concerns about growth. The FPC said on Tuesday that risks of a Brexit hit toBritain's huge financial services industry had eased since itsprevious meeting in November. On the possibility of raising the CCyB, the FPC said it hadto be forward-looking and "waiting for a more marked evolutionin domestic risks before acting could result in a need toconsider sharper adjustments to the UK CcyB rate, which wouldlikely carry larger economic costs", the minutes said. A "measured increase" in the first quarter of 2018 could beaccommodated by banks without a need to tighten creditconditions and would not have been a shock, they said. But the FPC also listed arguments for keeping the CCyB at 1percent, including modest growth in lending, and it said signsof intensifying risk appetite would need to persist to justifyan increase in the CCyB. More targeted options could be appropriate and the FPCstressed its preference of raising the CCyB rate only gradually. "At this stage, it might be beneficial to note the probabledirection for the UK CCyB rate, given how risk-taking haddeveloped, and to observe the evolution of risks over the comingmonths in considering whether a rise was warranted," the minutessaid. The central bank also noted there had been an increase inlending close to the riskiest end of the mortgage market. In 2014, the BoE limited lenders' ability to issue mortgagesthat were worth more than 4.5 times a borrower's annual income. The share of lending just below the highest loan-to-valueratio had recovered from troughs seen during the globalfinancial crisis although it remained significantly belowpre-crisis levels, the BoE said. (Reporting by William Schomberg and Andrew MacAskill; editingby David Stamp)