The Government has dropped proposals that would allow the Bank of England to cap loan-to-value ratios for mortgages.
Last week, the House of Commons approved the Bank of England Act 1998 (Macro-prudential measures) Order 2013. It allows the Financial Policy Committe to issue both recommendations and directions to the Prudential Regulation Authority and Financial Conduct Authority to introduce certain macro-prudential tools.
A Treasury consultation into macro-prudential tools closed in December and the Government has been at the centre of a heated debate over the last year on whether to give the FPC the power to cap LTVs.
Chancellor George Osborne and the International Monetary Fund agreed with the principle of an LTV cap but the FPC and Bank of England governor Sir Mervyn King argued the power is too political and needs parliamentary approval.
Last week, Treasury financial secretary Greg Clark told the Commons: “It is important to note that the power to make recommendations and give directions is available to the FPC, but that there is no requirement that it should get in the business of micro-managing these sectors.”
Labour MP and Treasury select committee member George Mudie said: “One of the macro-prudential tools discussed and dropped was LTV mortgages.
“Most of us were pleased when that was dropped, but it was a runner and was being discussed in FSA circles for some 18 months. I am certain, from watching the industry, that it had a great effect on the industry’s decisions, as it was trying to second-guess the FSA.”
Building Societies Association head of external affairs Hilary McVitty says: “We have never believed the FPC should have the power to cap LTVs and it doesn’t look like it is going to happen.
“There are potential problems if the Government does it by the back door by applying targeted capital requirements on higher LTV loans. It could have the same effect and lead to unintended consequences for borrowers, especially first-time buyers.”
The Council of Mortgage Lenders says it would expect a proper debate if an LTV cap is proposed.