By William Schomberg and David Milliken
LONDON (Reuters) - Bank of England Governor Mark Carney announced an easing of rules for banks in need of short-term cash, taking a new approach to how the central bank will work with the City of London five years after the financial crisis.
In his first major speech on British financial regulation, Carney struck a softer tone towards banks than his predecessor Mervyn King but denied that he was "cheerleading" for them.
Carney took over the Bank in August and quickly overhauled the way it conducts monetary policy. As a former Goldman Sachs banker with deep experience as a regulator overseeing the global banking industry, British bankers had been waiting to see how he would change the central bank's relationship with the City.
Carney said banks in future would be able to use lower-grade collateral to access BoE funds, and pay less for the privilege, as reforms to the banking sector made the industry less risky.
"Five simple words describe our approach: we are open for business," he told an event organised by the Financial Times, adding that support for non-banks such as broker-dealers and to ease foreign currency shortages could be coming too.
But he stressed the move did not relax bank regulation, five years after the government ploughed billions of pounds of public money into saving the sector from collapse.
Britain's economy is now starting to show signs of recovery after stagnating in the aftermath of its deep 2008-09 recession. A lack of business investment and lending by banks - especially to small and medium-sized businesses - is still a concern to the Bank but Carney underscored the huge role that the sector would continue to have in the British economy.
"We're not cheerleading for the City. That's not what this is," he said. "The point is to recognise a couple of facts. London is a global financial centre ... and the UK serves a role in maintaining an open global system."
"Some (critics) ... would prefer that the UK financial services industry be slimmed down if not shut down. In the aftermath of the crisis, such sentiments have gone largely unchallenged. But, if organised properly, a vibrant financial sector brings substantial benefits," he said.
Chancellor George Osborne appointed Carney to take over in July from King, who had frustrated bankers and at times Britain's finance ministry with his tough line on higher capital requirements and other rules for banks.
King also faced criticism at the start of the financial crisis in 2007, when he was reluctant to provide liquidity to banks lest it rewarded them for risky behaviour.
The Bank subsequently reformed how it provided liquidity to banks, but Carney said his further changes were "significant".
The BoE's current facilities are relatively little used, but Carney said there could be more need for them in years to come, when the end of its Funding for Lending Scheme and the sale of its 375 billion pounds of government bonds reduce the amount of spare cash in Britain's banking system.
The fundamental aim of the new measures is to help the economy grow by avoiding liquidity shortages, and obtaining liquidity will become largely an automatic process for banks authorised by the BoE's Prudential Regulation Authority, rather than requiring a separate application.
The Bank will also now be offering banks a broader backstop if they do not have enough top-quality assets to post as collateral on their derivatives and other transactions as tougher regulation bites over coming months and years.
However, Carney said banks would still need to keep careful checks on their finances.
"None of this means financial institutions are excused from the need to manage their balance sheets prudently," he said.
Carney did not touch on Britain's economy or central bank monetary policy in his speech. In a subsequent question and answer session, he stressed that he had no fixed timetable for raising interest rates and would consider the next steps when unemployment fell to 7 percent.
* For Carney's speech, see http://www.bankofengland.co.uk/publications/Documents/speeches/2013/speech690.pdf
* For more on the BoE's liquidity framework, see: http://www.bankofengland.co.uk/markets/Pages/sterlingoperations/liquidityinsurance.aspx
(Additional reporting by Huw Jones and Joshua Franklin; Editing by Ruth Pitchford and Andrew Heavens)