The Bank of England has defended its decision not to ask for control over loan-to-value ratios for the Financial Policy Committee, arguing the power to limit mortgage borrowing should rest with Government not unelected regulators.
Last month, the interim-FPC published a wish list of macro-economic tools it wants the committee proper to have at its disposal when it gets up and running next year. The Bank asked for a sectoral capital buffer tool which would see it able to require higher capital to be held against exposure to certain sectors. But it drew criticism for not asking for a lever to control LTV ratios.
Standard Chartered chief executive Peter Sands accused the committee of asking for tools which also stop people borrowing too much, but “by subterfuge”.
Writing in the Financial Times, Bank deputy governor for financial stability Paul Tucker says: “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.
“The higher the requirement [of the sectoral capital tool], the closer it approximates to constraining portfolios of high LTV loans. But it would not cut across lenders’ judgements on the creditworthiness of individual borrowers”
Last week, Sands accused the FPC of taking an “extremely interventionist” approach.
Writing in the FT, he said: “It might not be obvious from the somewhat technical language, but in effect the FPC wants to control how much lending there is in every aspect of the economy, from manufacturing to mortgages, and how much it costs. This reeks of 1970s style quasi-nationalisation of the industry.
“If you want to contain bubbles you have to be able to stop people or companies borrowing too much. That is what taking the punchbowl away means. But, lacking the courage to do this directly, the FPC wants to achieve the same end by subterfuge.”
Tucker writes that it will be particularly important to justify any sectoral intervention by the Bank, and that any intervention must have the objective of underpinning the resilience of the financial system. “This is not an exercise in economic or social engineering. It is about economic stability,” he says.
The Treasury has yet to say whether it will give the FPC the tools it has asked for.