LONDON (Reuters) - Britain's housing market is not entering a new price bubble but bank lending must be watched closely after the launch of a new state mortgage guarantee programme, the Bank of England's next deputy governor said on Monday.
"It doesn't look that we are in a bubble," Jon Cunliffe, who starts at the central bank next month, told members of parliament's Treasury Committee.
He said the British government's "Help to Buy" mortgage programme did not pose a risk to the country's banking system, but could be a danger to individual households.
"In terms of whether it leads to households becoming over-exposed because they can now borrow higher amounts, there is a possibility it could do that and that would create more of a risk."
"That, I think, is one of the reasons it's necessary to keep a very firm eye on the lending standards that lenders use, the underwriting standards," he added.
Cunliffe is due to replace Paul Tucker as the BoE's deputy governor responsible for financial stability on November 1.
In response to questions from MPs about monetary policy, Cunliffe echoed comments by BoE policymakers, saying the central bank's new policy of forward guidance helps mitigate the risk of premature expectations of higher interest rates.
He also said he assumed the United States would resolve the shutdown of the federal government, but added that the impact of any U.S. debt default would be very large and that banks in Britain, including the Bank of England, should be making contingency plans.
In the slightly longer term, one of the main risks faced by Britain's financial system was the danger of a rapid rise in global short-term interest rates.
"An abrupt normalisation of interest rates could threaten financial stability if UK borrowers struggled to service their debts and if intermediaries with leverage were shown to be vulnerable to a fall in asset prices," he said.
"Although they have deleveraged following the crisis, UK households remain highly indebted by historic standards," he added.
Cunliffe has most recently served as Britain's top envoy to the European Union in Brussels. In a previous role he led British negotiators at G8 and G20 negotiations during the financial crisis.
(Reporting by Huw Jones and David Milliken, writing by William Schomberg editing by Christina Fincher)