Regulations which potentially constrain lending to small businesses should be eased when the economy is suffering, top Bank of England official Andrew Haldane said in an interview with the Financial Times on Monday.

Haldane, executive director for financial stability at the Bank, believes the rules governing how banks calculate risk weightings should be relaxed when economic growth needs boosting.

There is a strong argument for making risk weights dynamic and real-economy focussed. At present, they are calibrated to the risk
to a bank. In future, they need to reflect returns to society, he was quoted as saying.

Risk weightings show how much capital is required to back a loan and therefore how costly it is to provide.

Banks must either apply standard risk weightings to certain assets, as defined by regulators, or use their own internal models to assess risk, with the regulator signing off on the outcome. However, these forms of weighting can compound the shortage of credit.

Haldane believes global parameters should be set by the Basel Committee on Financial Supervision, the international watchdog, but it should be up to local regulators, such as the Bank's new Financial Policy Committee, to fine-tune the details.

Haldane highlighted the danger that banks might seek to shrink their loan books as one way of complying with the new capital ratios.

The deleveraging risk is something the Bank takes very seriously. This, for me, is one of the risks we must be most vigilant about. This is a situation where macro-prudential regulation earns its spurs by leaning against banks' instinctive reaction to duck for cover.

You can't just change risk weightings at whim because what really matters is that risk is priced correctly, he said.

(Reporting by Stephen Mangan; Editing by Yoko Nishikawa)