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Turner wants power to seize ‘party punchbowl’

Turner: Four macro-prudential tools put forward in speech
Turner: Four macro-prudential tools put forward in speech

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

At the Cass Business School in London last week, FSA chairman Adair Turner addressed the role of credit in asset price cycles, which he said can drive credit supply in a “self-reinforcing and destabilising process”.

But Turner stressed 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 which are of economic benefit.

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

He said the regulator could look at borrower-focused policies, such as maximum loan-tovalue 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 that would take into account credit/asset cycles as well as consumer price inflation. But he said this option has three disadvantages, that the elasticity of response is likely to be widely different by sector, that exchange rate appreciation and
any divergence from current monetary policy objectives would dilute the clarity of the commitment to price stability.

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

He said countercyclical capital requirements could be varied by sector and increased against commercial real estate lending but not against other categories. He warned that 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 partygets out of hand. 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.”

Calculis director Alex Pegley says: “Banks are doing a fantastic job at the minute of regulating the availability of credit as nobody can get any. This is a bit of a case of shutting the stable door after the horse has bolted, but over the long term I think these things do need to be looked at. Capital adequacy, maximum loan to value ratios and maximum multiple of income need to be considered and regulated but at the moment it is a non-issue.


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