New Powers Over Mortgage Ratios

During the Second Reading of the Government's Financial Services Bill on 6 February, the Chancellor, George Osborne, announced Government plans to give the Bank of England new powers over mortgage ratios.

The Chancellor wants to establish a new Financial Policy Committee at the Bank of England, which would be able to set loan-to-value ratios on mortgages in order to prevent or burst housing bubbles before they become unsustainable. Likewise, the Committee would be able to lower capital requirements for banks when we are experiencing house price deflation.

The Chancellor stated:

This is an important point that I want to flag up so that the House understands what we are collectively embarking on. We are seeking to give the Financial Policy Committee the tools to help to dampen down a credit boom or to help in a credit crunch. ... it will be able to alter the maximum loan-to-value ratios in mortgage lending in order to curb an unsustainable rise in house prices. It will also be able to do the reverse, should we face unwanted house price deflation. It will also, potentially, be able to alter capital requirements for banks, in a counter-cyclical way. I should say that these are just possibilities; they are potential tools that the Committee might want to use.

One key feature is that the measures will be independently applied, so there will be no political pressure to, say, keep a housing boom stoked up as an election approaches. Another key feature is that the Financial Policy Committee should act symmetrically, that is the intention of Parliament. Its job will be to act not just to moderate a credit boom but to try to alleviate a credit bust. The precise tools that we give the FPC have yet to be determined... We have sought the advice of the interim organisation that we have created, and it will come to us with proposals for the kind of tools that the permanent body will need. We will then seek the approval of both Houses of Parliament through the affirmative resolution procedure which will of course involve a debate before we pass those tools over.

I freely accept that we are in largely uncharted policy-making territory, here or anywhere in the world. Many other jurisdictions are considering such measures, but we are ahead of most of them. Surely the experiment of making no attempt to moderate the credit cycle letting the bubbles grow and burst, then cleaning up afterwards has been an unmitigated disaster, and we would be failing if we did not look for an alternative approach.

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