Bank of England reluctant to control mortgage lending rules

A Parliamentary Treasury committee is to open an inquiry into what policy tools should be provided to the Bank of England to allow the central bank to limit mortgage lending to combat property bubbles.

The Bank of England is reluctant to receive such powers as it believes the issue is too politically sensitive and should be handled by government. Deputy Governor, Paul Tucker, wrote to the Financial Times last week making this point.

The proposals would allow the bank to limit loan-to-value and loan-to-income ratios which could stop property buyers – particularly first-time buyers – from getting a loan to own their own home.

The Treasury committee wants to investigate whether the central bank should be allowed these powers to help maintain stability in the economy and to look at why the Bank of England is reluctant to intervene to stop riskier mortgage lending.

The new powers could be given to the central bank if the Chancellor, George Osborne decides that this should be part of the extended role the Bank of England is to play following the reforms to the UK’s financial and City regulation. It is likely that the newly-formed Financial Policy Committee (FPC) would take this on if the government decided to add this to the extra range of powers to be given to the FPC, which has yet to be decided.

Last week the International Monetary Fund (IMF) said that the central bank should have powers to ban certain types of mortgages.

Andrew Tyrie, the chairman of the Treasury Committee said that the Bank of England is reluctant to take on these powers unless there was a high degree of acceptability of them doing so. He believes they should become more accountable to parliament and the public and that such transparency would allow them to direct loan-to-value and loan-to-income decisions for the benefit of the overall economy.

MPs on the committee will also study whether the central bank should be able to limit or increase the amount of capital banks should hold to provide more flexibility on lending in an economic downturn.

At the moment an interim FPC exists and it will become fully operational in the Spring of 2013.

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