LONDON (Reuters) - Forcing banks to hold adequate levels of capital won't hamper their ability to feed credit to the economy, a senior Bank of England policymaker said on hursday.
Britain has been among the most hardline regulators in the world in requiring banks to hold high levels of capital, after UK taxpayers had to rescue lenders during the 2007-09 financial crisis.
But saying regulators who ask for higher levels of capital at banks are draining credit from the real economy is the "economics of the madhouse", said Andrew Haldane, the central bank's director of financial stability.
"This argument makes no logical sense whatsoever. The only way we will get credit channels working properly is by having a banking system that is adequately capitalised," Haldane told the Economist's Bellwether Europe Summit.
Britain's Co-op said on Wednesday that partly due to tough bank capital regulations it had pulled out of buying hundreds of branches from Lloyds.
Haldane said efforts by central banks to stimulate economies had helped spark a "mini rally" in stocks in the past nine months, as intended, despite continued disappointing economic growth, Haldane said.
There were several reasons for this significant disconnect but the examples of degrees of overexuberance in asset markets was "somewhat spotty" and more true of the United States and European markets, he said.
One reason to be relaxed was that these "quasi bubbles" are not underpinned by higher levels of leverage.
Haldane said the policy medicine had worked but he urged caution to avoid creating problems for the future.
There was a need to ensure that such expansive policies don't overachieve and that the "patient does not become too addicted to the medicine".
The pre-financial crisis debt imbalances have been a drag on growth for the past five years and are very likely to remain a "dragging anchor" for the next five years, he said.
Haldane is a member of the Bank's Financial Policy Committee which warned recently that stock investors may be taking a "too rosy" view.
(Reporting by Huw Jones, editing by Marc Jones)
