Carney speaks about Brexit and BoE's response

LONDON (Reuters) - Bank of England Governor Mark Carney and other BoE officials are speaking in parliament about measures taken by the central bank after Britain's vote to leave the European Union and the bank's latest report on the country's financial system.

MARK CARNEY, GOVERNOR

ON REASON FOR LOW LEVEL OF LONG-DATED GILT YIELDS

"There is a big element of what's happening in markets which is in our opinion, in my opinion, a hedging of downside risk. This is an economy which is highly flexible, it has got tremendous strengths and they are reinforced by a financial system that can withstand huge shock to it. And so there will be adjustment and there will be growth in this economy without question ... I would not take that core signal in terms of the prospects of this economy, they are much better."

ON RISK OF SNAP-BACK IN YIELDS

"One of the risks is that you get a snap-back in yields, because of changes in growth or inflation expectations, changes in policy, policy uncertainty - a variety of factors could cause a snap-back, and it is certainly one of the risks against which we have to stress our institutions. It is particularly when it becomes conventional wisdom that it isn't going to happen that you have to make sure the institutions are prepared both in terms of capital and risk management for that tail event possibility."

ON INVESTORS TAKING OUT INSURANCE FOR EXTREME RISK EVENTS

"There is a chicken-and-egg element to this, which is you can start with central bank policy or you can start with the underlying fundamentals that are driving these rates, including if one takes risk aversion as a fundamental and then central banks having to set policy consistent with those fundamentals in order to provide appropriate stimulus. What is unusual about the current environment and amplifies it is that you have extremely low interest rates and very high equity risk premium - the equity risk premium in the UK has gone up quite substantially. It has been rising over several years substantially and in the last few weeks. And that is consistent for me ... with an investor community as a whole that is taking out some insurance for extreme risk events and the insurance is taken out of the bond markets. So safety of money, even with negative interest rates, is valued as a hedge for a portfolio."

ON UK BANK HEADQUARTERS AND SCOTTISH ISSUE

"Certainly what we saw in terms of the risk to financial stability around the last Scottish referendum, a lot of it addressed the headquarters of major financial institutions and then the responsibilities of the home government for those financial institutions and whether or not they have the fiscal capacity to meet those responsibilities, so without prejudice to any political evolution, certainly those types of issues should be addressed well, well in advance of any decision that would be put before anyone (such as a second independence referendum)."

ON COMMERCIAL REAL ESTATE FUNDS

"The open-ended funds with respect to commercial real estate are an extreme case of a more general issue, and the more general issue is one that the FPC has been looking into, which is there has been a general drift, a general trend to create funds that have daily liquidity that invest in increasingly illiquid securities."

"If you had a spectrum of funds, this is at one end of the spectrum, both in terms of the illiquidity of the assets - it is hard to sell a building overnight at a fair price - and the fact that the nature of the redemptions ... advantages those who redeem early."

ON ITALY

"Let me start with UK exposure to Italy. UK banks direct exposure to Italian banks is less than 1 percent of common equity of the UK banks at .9 percent."

"UK bank exposure to the Italian economy today is about 11 percent of common equity ... it's quite modest, so that is well managed."

"In terms of the seriousness of the situation in Italy, yes this is a sector that has 18 percent non-performing loans of the total loan stock. The economic outlook is modest at this stage and of course the issues with the banks are reinforcing that."

"There are likely to be required some form of recapitalisation of some of those institutions. There is a macro-economic risk and the Italian authorities are aware of it and are looking through to solutions to that."

ON OUTLOOK

"If the outlook has worsened, to use that term, in the judgement of the MPC there always could be monetary response if that is consistent with its remit."

Question: It is not impossible that a crunch could still happen in terms of lending?

"I am worried about using the term (after) 2008, because we are in a very different situation."

"As you would expect, we have been talking to the banks ... and their orientation is outward, outward-facing, their balance sheets are in a strong positions, they are in the business of taking their own risk, and if they have to I am sure they will adjust their risk profile, but they have a lot of capital and they will need to put that to work. Again, it won't be supply constrained, it won't be a credit crunch, it will be a function of the overall economic outlook, which will be determined by decisions away from the financial sector."

ON HSBC

"HSBC is under a deferred prosecution agreement in the United States ... and we didn't intervene with the Justice Department."

Question: I was asking whether you held any conversations or discussions with the Chancellor. The allegation is that UK authorities have ... been meddling, that is the allegation being made by this Republican report.

I'm trying to get to the question of were you aware of any such meddling, did you have any such conversations with the Chancellor of the Exchequer prior to the decision being taken by the attorney?

Carney: "Number one, no. Number two, no."

ON BANKS AND CHANGE IN STERLING RATE

"When there was a big change in sterling, our banks were able to shoulder it, they had no open position and there was no amplification of that change."

ON BANK BUFFERS

"They do have money available, even in a stress scenario, before they get to those buffers. Not an extreme stress but a mild stress scenario. This gives them more room, it makes it less likely that they start restraining activity now in order to avoid hitting those buffers and constraints for the future.

"We wouldn't represent this as the single silver bullet, it is part, and should be seen, as part of a series of measures, including contingency planning."

ON CREDIT

"We really do want to make it as clear as possible to households and businesses, that credit should be available for the right ideas and the right transactions, be it a mortgage or new business."

"The determinant of credit growth in the economy for the next little while will be credit demand as opposed to constraints of credit supply."

"If the economy slows, and certain credit-intensive sectors of the economy particularly around property slow, we would expect obviously less credit growth."

ON RISK ENVIRONMENT

"The risk environment has shifted. I think we all recognise, to varying degrees, that we are in a situation of increased uncertainty."

"It will take some time for that (extra lending) capacity (created by lower counter-cyclical capital buffer) to be used up, just considering what credit demand is in a normal year and given that the risk environment may be more risk-averse."

ON TRANSPARENCY

Question: Are any other records (other than published minutes) kept of your private conversations with the Chancellor?

"It is important that governors and chancellors can have private conversations about important economic and financial issues and we'd be derelict in our duties if we did not."

"I'd be very wary about establishing a precedent which limited freeflowing discussions between future governors and future chancellors at this point ... nor do I think it is in the interest of the functioning of the system that every conversation, every discussion between the governor and the Chancellor or whoever is minuted, recorded, tweeted in real time - that is not in the interest of monetary and financial stability."

ON CRITICISM OF BANK AND OF HIS ROLE

Asked about the "extraordinary set of allegations being made by two former chancellors" against the BoE, Carney said: "I agree it is extraordinary in all senses of the word."

"So what was in the March record, what's in the July FSR (financial stability report) are the views of the FPC. They are not prejudged, they are not pre-decided. They are based on analysis, robust discussion..."

"I did not prejudge the minds of those policy committees, nor could I. That's not the way the system works, that is not the way the system is set up."

JON CUNLIFFE, DEPUTY GOVERNOR, FINANCIAL STABILITY

ON FUTURE COSTS FROM BANKS' MISCONDUCT

"I think when it comes to conduct, there is uncertainty about how large future conduct costs will be ... I think investors are looking to know when is the end of that and what else might be coming down the pipe."

ON RISK PREMIUM ON UK ASSETS

"I think we've probably seen the start of financial markets putting a risk premium on UK assets, simply because of the uncertainty ... That will feed through to bank lending."

RICHARD SHARP, EXTERNAL MEMBER, FINANCIAL POLICY COMMITTEE

ON REAL ESTATE FUNDS

"The information from the market is that they are out seeking the opportunity to liquidate their portfolio, but it's not at any cost. They are going to try and do it in an orderly fashion."

ON CRITICISM OF BOE

"One of the issues that was clear to us, and has certainly demonstrated in the markets, is that this event indeed transpired to be a significant domestic shock."

Question: Has there been startling dishonesty by the Bank of England in your view?

"Absolutely not - I interrogated the models, and I was quite satisfied that the models were created on the basis of independent economic assumptions by economists trying to determine the best outcome for the different scenarios."

Question: Do you also reject the peddling of phoney forecasts?

"Yes."

(Reporting by Costas Pitas, Karin Strohecker and Kate Holton, compiled by Estelle Shirbon)