Bank of England's Kohn says cannot end asset bubbles

LONDON (Reuters) - The Bank of England is aiming to create a financial system that can withstand sharp falls in asset prices, not to attempt the near-impossible task of stopping future bubbles, one of its policymakers said on Wednesday.

Donald Kohn, who was formerly vice-chairman of the U.S. Federal Reserve and now serves as an external member of the BoE's Financial Policy Committee, said he would be vigilant towards higher house prices, but did not aim to stop them.

"Our objective is not to iron out all cycles of asset prices or credit," he said in a speech to the Oxford Institute for Economic Policy, echoing comments from fellow FPC member Martin Taylor last month.

"Financial cycles, imbalances and asset bubbles will persist. It is human nature to become overly optimistic and pessimistic, to go through cycles of greed and fear. Herding behaviour in markets reinforces this tendency," he continued.

The Bank of England became Britain's main financial regulator in April, and the FPC has powers to change capital rules for banks and take other measures to ward off the risk of systemic bank collapses.

Many economists are concerned that government schemes to boost lending and the housing market risk creating a house price bubble, and next September the FPC is required to report on the impact of one such programme, Help to Buy.

Mortgage lender Halifax reported earlier on Wednesday that house prices in the three months to October were rising at their fastest pace since May 2010, though the increases are mostly in London and price nationally are below their 2008 peak.

Kohn said he was keeping a close eye on the housing market, adding that where booms were driven by lending, the FPC would aim to ensure lower peaks and shallower troughs in prices.

"One particular danger sign would be evidence of a bubble dynamic in prices - that is, increases in prices in anticipation of future increases," he said.

"The FPC will take action as needed to ensure ... credit standards do not become too lax in the mortgage market and that lenders are adequately capitalised to manage losses."

(Reporting by David Milliken; editing by William Schomberg)

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