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Bank of England mulls LTV caps

Bank of England deputy governor Charles Bean has hinted that regulators may be considering caps on loan-to-values as part of a range of measures to tackle risky lending.

Speaking at the Federal Reserve Bank of Kansas City Annual Conference in Wyoming on Saturday, Bean said that “direct constraints” on lending are one of a number of tools that regulators can use to try to stave off credit booms.

He said: “There is the option of introducing direct constraints on the terms or availability of credit, for instance imposing maximum loan-to-value
ratios in the mortgage market.”

But he added: “The best approach seems likely to involve a portfolio of instruments.”

Bean also hinted that the Bank may look at further quantitative easing to help sustain the recovery.

Bean said: “The deleveraging process is incomplete, the recovery remains fragile and a considerable margin of spare capacity is yet to be worked off, while further policy action may yet be necessary to keep the recovery on track.”

Bean suggested that higher interest rates would not have been enough to prevent the recent credit boom and subsequent crunch.

In the run up to the credit crunch, the Bank of England increased base rate from 3.5 per cent to 5.75 per cent, but Bean’s comments suggest that hiking it further would not have been enough to stave off the crisis.

He said: “Monetary policy seems too weak an instrument reliably to moderate a credit / asset price boom without inflicting unacceptable collateral damage on activity. Instead, with an additional objective of managing credit growth and asset prices in order to avoid financial instability, one really wants another instrument that acts more directly on the source of the problem.”

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