The Bank of England’s (BoE) deputy governor for financial stability Paul Tucker said this week that the government – not unelected officials – should be the only institution with the power to limit mortgage borrowing.
The BoE has been criticised recently for failing to ask Westminster for more power to limit loan-to-value (LTV) ratios on mortgages. Critics believe such a move – while politically unpopular – is an effective way of preventing economic bubbles.
However, Mr Tucker said in a Financial Times article today that such “Selective capital controls” had not been seen in the UK since the 1970s and should not return now.
“Outright bans on households taking out loans with high LTVs – including banning families borrowing from outside the UK financial system – would, in the view of many of us, be a matter not for the FPC but for government to pursue directly,” he argued.
Instead of such mortgage controls, the Bank’s financial policy committee has asked the Treasury for power to discourage lending in certain sectors like property by raising the minimum amount of capital that banks must hold against loans. This “would not cut across lenders’ judgments on the creditworthiness of individual borrowers” in a way that imposing limits on mortgage LTVs would, Mr Tucker said.
The BoE deputy added that the committee agreed that LTV limits did have certain benefits compared to other measures, not least that by using them, the Bank would send “a clear and strong public signal of emerging risks”. Despite this, he insisted that setting such limits would in themselves be difficult because the “sustainable” level of property prices is not itself clear.