Britain's banks must boost their capital buffers due to the lingering threat of a severe crisis in the euro zone, leaving the job of supporting the economy to the Bank of England's monetary policy, a top Bank official said on Tuesday.

Bank Deputy Governor Paul Tucker, who is responsible for financial stability, highlighted the need for new, so-called macroprudential tools to fight excesses in financial markets, according to the text of a speech to economists.

While such tools could allow a central bank to relax capital requirements to encourage banks to ease lending conditions, such a move was not sensible now, as the lingering threat of a severe crisis in the euro zone has left banks operating in an extraordinarily risky environment, Tucker said.

In current circumstances, gradually building resilience through retained earnings is best for stability and recovery, because it helps preserve the capacity to lend 'the day after tomorrow,' he said.

Tucker, who is seen as one of the potential contenders to follow Bank Governor Mervyn King at the helm of the Bank, is also a member of the Bank's new Financial Policy Committee, which is in charge of tackling systemic risks to financial stability.

The burden to underpin demand is now on monetary policy, Tucker said, noting that central banks like the Bank have injected extraordinary monetary stimulus.

That stimulus can be sustained only so long as medium-term inflation expectations remain anchored to our target of 2 percent. We must be alert to the need gradually to withdraw stimulus as and when recovery builds, he said.

The Bank's Monetary Policy Committee voted to extend its quantitative easing asset purchases by another 50 billion pounds earlier this month, though the voting record showed that two of the nine members favoured a larger boost.

Tucker had joined King in the majority vote to take the purchase total to 325 billion pounds.

Some of Tucker's fellow policymakers have indicated that another QE extension in May remains a possibility, although more upbeat news from the economy has eased concerns of a renewed recession.

The central bank predicts a modest recovery in the second half of this year after a weak start. It sees inflation falling below its 2 percent target towards the end of 2012.

LESSONS

In his speech, Tucker identified two main explanations for the strong credit growth and the asset price appreciation prior to the financial crisis.

First, a fall in the world safe real rate, due to excess savings in the East, he said. Second, increasing global liquidity, transmitted through expansive cross-border lending, kicked off by prolonged accommodative monetary policy.

Tucker said macroprudential policies had a key role in the future to tackle such developments.

We must not rely entirely on central banks 'mopping up' after financial crises, he said. We need overall macro regimes that aim to make chronic imbalances and over-indebtedness less likely and less threatening.

Central banks also had to take into account that the transmission of their policies was affected by risk appetite, and that they also affected risk-taking behaviour.

We need, in particular, to be ready to contain private sector liquidity creation even when it is not driving excess nominal demand growth, he said. That will amount to arresting occasionally the expansion or leverage of the banking system and shadow banking sectors.

(Reporting by Sven Egenter; Editing by Dan Grebler)