Moves to prevent bank lending destabilising the economy

Banks offering large home loans that risk fuelling a future housing boom will have to hold extra capital to keep the financial system safe, the Bank of England said.

While the weak economy makes a credit boom look a distant prospect for now, the central bank and lawmakers are already putting in place new rules to stop lending destabilising the economy in future. Prior to the crash, many lenders offered mortgages covering almost all the value of the property, while in some cases borrowers were not required to provide evidence of their ability to repay the loans.

Starting in April, the central bank’s Financial Policy Committee (FPC) will get broad powers to regulate how much credit is flowing into the economy and to clamp down on potentially destabilising hotspots in sectors such as property.

Hide Ad
Hide Ad

The FPC stopped short of asking for powers to directly regulate how much of a deposit home buyers should put down, saying more debate was needed on this politically sensitive step.

The FPC said more about how these powers would work in practice, and what warning signs it would look for before it orders banks to top up capital buffers so that they have enough reserves to mop up losses on soured loans in future.

The tougher rules might slow growth during a future credit expansion, the FPC said, but it insisted they would bring long-term benefits by reducing the chance of another financial crisis which could require taxpayers to shore up banks.

“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,” said the Bank of England. “The best available studies point... towards only a modest negative impact on near-term growth if (capital rules) are tightened.”

Related topics: