Speaking at the London School of Economics last week, Sir John Gieve said that one way to cushion banks, along with the Spanish style counter-cyclical capital adequacy model, is to restrict lending.
He said: “Loan to income and loan to value ratios tend to rise in any credit boom as lending standards become lax and asset prices inflate. In theory, a ceiling on these ratios could have provided an effective brake on the excesses of the last boom.”
But Gieve admitted that no one was blameless for the present situation. He said: “The tripartite’s footwork may have owed more to John Sergeant than Fred Astaire.”
Gieve added: “We cannot leave risk management to the banks. Not only may they get it wrong but their risk systems, like their marketing, are directed at their competitive advantage and they are not motivated or in a position to look after the system as a whole.”
Gieve said that along with adding homeownership to the consumer price index and changing accounting to recognise future losses, he said that the Bank of England, the Treasury and the FSA must not just “mop up” any future bubble burst but stop the bubble reaching bursting point in the first place.
“Rather than assuming that the system is capable of self-regulating itself, our default position should be one of cautious scepticism,” he said.