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Turner calls for greater powers to address asset bubble concerns

The FSA has called for greater powers to control lending practices in certain sectors to enable them to prevent future asset bubbles.

Lord-Turner.jpg

Speaking at the CASS Business School in London last night, chairman Adair Turner addressed the role of credit in driving asset price cycles, which he said can drive credit supply in a “self-reinforcing and destabilising process”.

However, Turned stressed that using a “one size fits all” approach to curbing asset price bubbles  in commercial or residential real estate could have unintended consequences of restricting credit to other sectors of economic benefit.

Turner suggested four different macro-prudential tools, each with their own advantages and disadvantages, as potential ways of preventing future asset bubbles.

He said the regulator could look at direct borrower focused policies, such as maximum loan-to-value ratios either applied continuously or varied though a cycle. This idea is being looked at as part of the FSA’s Mortgage Market Review.

Turner also suggested an interest rate policy to take into account of credit/asset cycles as well as consumer price inflation. But he said this option has three disadvantages, that the interest elasticity of response is likely to be widely different by sector, that higher interest rates can drive exchange rate appreciation and that any divergence from current monetary policy objectives would dilute the clarity of the commitment to price stability.

Another option he suggested was across-the-board countercyclical capital adequacy requirements, increasing capital requirements in the boom years, but warned this too could cause variable effects.

He also suggested that countercyclical capital requirements could be varied by sector, increased against commercial real estate lending but not against other categories. He warned this option could be undermined by international competition.

Turner said: “There are no easy answers here:  but some combination of new macro prudential tools is likely to be required.  We need ways of taking away the punchbowl before the party gets out of hand. And a crucial starting point in designing them is to recognise that different categories of credit perform different economic functions and that the impact of credit restrictions on economic value added and social welfare will vary according to which category of credit is restricted.”

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. This seems to have become a routine quarterly cycle of demands. One month he’s calling for more money. The next he’s calling for more staff and the month after that he’s calling for more money. The following month it’s back to calling for more money and so on.

    Forget all the crap about “macro prudential tools”. Credit card lending should be limited to 3 or certainly no more than 6 months disposable income. All mortgage applications should be subject to the same standards of underwriting that were standard until about 10 years ago. If 3 x salary + 1 x salary for the wife aren’t enough, then you can’t afford the house ~ period.

    Says Turner “We need ways of taking away the punchbowl before the party gets out of hand”. In case you hadn’t noticed, Lord Turner, the party was already way out of hand when the FSA is supposed to have taken on the regulation of mortgage lending practices in 2004. And what did the FSA do about it then? Nothing.

    The biggest things that need restricting are the FSA’s powers, staff and budgets.

  2. Incompetent Regulators Awards Team 18th March 2010 at 10:54 am

    More management speak from Mr bullsh*t. Lecture lecture lecture. Say no more.

  3. Socially useless regulators 18th March 2010 at 12:29 pm

    Like a great big cockerel, crowing while fluffing up his feathers in order to impress those less fortunate than himself. Much admired by those who occupy his hareem in a deathly grey surreal world where the once proud regulators are regularly pilloried for their failures.

    If it were the ship that infamously hit an iceberg it would have sunk from sight by now, unfortunately we have to watch it flounder on while those it regulates drown in a sea of bovine excrement.

  4. Socially useless regulators 18th March 2010 at 2:04 pm

    Like a great big cockerel, crowing while fluffing up his feathers in order to impress those less fortunate than himself. Much admired by those who occupy his hareem in a deathly grey surreal world where the once proud regulators are regularly pilloried for their failures.

    If it were the ship that infamously hit an iceberg it would have sunk from sight by now, unfortunately we have to watch it flounder on while those it regulates drown in a sea of bovine excrement.

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