A key committee of the Bank of England is feeling its way in terms of striking a balance between making sure banks are strongly capitalised while also encouraging them to lend to businesses, a key policymaker said on Wednesday.
The Bank's new Financial Policy Committee in September urged banks to strengthen liquidity and capital buffers but a minority on the committee wanted banks to use some of the capital to keep credit flowing to a fragile economy.
Robert Jenkins said he and his co-members of the FPC had been dealing with tension over whether to allow banks to roll back their capital buffers in the hope they would then lend more to small businesses.
That debate within the policy committee was very thoughtful and very difficult, Jenkins told the parliament's treasury committee.
It was just generally felt it was better in these uncertain times to err on generating confidence in the system as a whole... rather than to push on a string in terms of lower capital requirement that might or might not find itself into lending, Jenkins said.
UK's top banks have capital buffers of 10 percent or more, well above regulatory minimum levels laid out in coming years. The lenders have also been forced by the FSA to build up their liquidity buffers.
Lawmakers were holding a hearing into Jenkins' appointment to the FPC launched early this year to spot and tackle broader systemic risks to financial stability.
Last week, another FPC member, Adair Turner, chairman of the Financial Services Authority, said the committee was on the horns of a dilemma over bank capital.
The treasury committee's chairman Andrew Tyrie called on the FPC this week to make sure that the tighter bank liquidity rules don't hamper the economy.
The outlook for the economy has deteriorated, with the Bank of England partly blaming the euro zone debt crisis.
The FPC's next report is due at the start of December.
The FPC is feeling its way. We'd better feel our way pretty fast, Jenkins said.
(Reporting by Huw Jones. Editing by Jane Merriman)