The Bank of England's Financial Policy Committee (FPC) on Monday proposed powers to address the capital which banks hold against real-estate assets, derivatives and bonds.
The FPC warned that British banks would be asked to hold extra capital to keep the financial system safe should they be judged they were too liberal with home loans that risk fuelling a future housing boom. Property booms and busts have been behind many of Britain's economic downturns over the past few decades.
The committee suggested stricter rules which could slow growth in the short-term during credit expansion but would in the long-run reduce the risk of a future financial crisis, Reuters reported.
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"If these tools are successful in reducing the likelihood and severity of financial crises, their use is likely to boost the expected level of UK GDP," the committee said in a draft policy statement.
"The best available studies point, on average, towards only a modest negative impact on near-term growth if (capital requirements) are tightened."
The FPC is seeking to strengthen the financial system by gaining powers over so-called sectoral capital requirements from the government.
Should firmer credit rules lower the outlook for inflation, the Bank's Monetary Policy Committee could have lower interest rates than otherwise "to cushion the impact on growth".
However it may be some time before the FPC tightens the rules.
Bank of England (BOE) Governor Mervyn King is leading the committee which is operating on an interim basis as legislation passes through parliament.
King will appear at a parliament hearing Tuesday along with members Andrew Haldane and Michael Cohrs to address questions on the BOE's semi-annual Financial Stability Report.
RD
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