Bank of England to cap mortgages
Telegraph – House buyers could be refused mortgages under new Bank of England powers to be unveiled by George Osborne.
The Chancellor will announce that he will hand a host of new controls to the Bank to prevent another financial crisis.
The powers will mean that, for the first time in the modern era, the Bank could impose restrictions on the amount banks can lend.
The reforms, to be sketched out in the Chancellor’s first Mansion House speech in the City of London, represent a revolution for the City, since in the past banks have always had freedom to decide to whom they can lend.
The Bank and its Governor, Mervyn King, would be able to prevent banks from lending too much, or to over-extended customers, if they judge that this would de-stabilise the economy.
The precise details of the controls the Bank is to be given will be detailed fully at a later date.
However, they are likely to include restrictions on the loan-to-value ratios offered to customers. For instance, families could be prevented from taking out a mortgage for anything more than 75 per cent of the value of their home.
The collapse of Northern Rock was widely attributed to its policy of lending customers up to 125 per cent of the value of their homes – despite the inability of many to repay the loans.
It is hoped that the restrictions will also curb house price booms stimulated by excessive lending.
Mr Osborne’s “toolkit” is also likely to include broader restrictions on lending to businesses.
The controls, which could be applied either to specific institutions or to the entire mortgage industry, will vary over time as the economy ebbs and flows.
Critics will suggest it marks a significant shift from free market policies towards 1970s-style controls on financial institutions. They bear some resemblance to the rules in place in Hong Kong and China, where regulators have been credited with using them to prevent housing bubbles.
Under Mr Osborne’s scheme, the Bank of England will become a significantly more powerful body than it was under Gordon Brown.
The Governor will have the power to impose specific restrictions on banks if he deems it necessary, though his main role will be to warn when he fears the economy is becoming overheated or at risk of collapse.
Whereas previously the only power at the Bank’s disposal was to move interest rates, the new tools will provide an extra level of control over the financial system.
The Financial Services Authority, which is currently in charge of regulating the financial system, will become focused on individual banks, deciding how to impose the Bank’s rules on lending.
Although the Conservatives pledged before the election to dismantle the FSA entirely and give the Bank of England full responsibility for monitoring financial stability, they have retreated slightly from this position.
In tonight’s speech, however, the Chancellor will explain that much of the work previously done by the FSA will be done by the Bank of England and by a new consumer protection agency.
He will also set out his plans for a new commission that will examine whether to split up Britain’s biggest banks into smaller institutions that are no longer judged “too big to fail”.
Among the proposals the commission will consider is one lodged recently by Mr King: that all banks should be obliged to offer their customers new “bombproof” accounts, which would be protected if the rest of the bank collapsed.
The Chancellor will also repeat his pledge to introduce a new tax on the banking system, although he will leave the full details of this proposal until next week’s emergency Budget. The Government intends to set up a new levy on bank assets, putting this money towards fixing the budget deficit.
Treasury insiders believe they could make significantly more than the “cautious” £1 billion a year they originally promised the levy could generate. Tax experts have warned that any plan to introduce the tax without international approval would risk driving business out of Britain.