Out-Law News 1 min. read

New Bank of England financial stability powers to include ability to set mortgage limits


The Bank of England is to be given new powers over the housing market and banks' capital holding requirements as part of its role to guard against risks to UK financial stability, the government has confirmed.

The announcements follow a request by the Financial Policy Committee (FPC) within the Bank of England last year to be given more power over loan to value limits and debt to income limits on homeowner mortgages, and a consultation exercise. The government will also take forward plans to give the FPC the power to set the leverage framework applying to the UK banking sector, which was set out in a separate consultation last year.

UK chancellor George Osborne said that the new powers would help to address the country's "age-old vulnerability to banking and housing booms".

The new powers will allow the FPC to issue directions to lenders about the proportion of owner-occupier mortgages they can issue for more than a given percentage of loan to value of the property. It has already restricted the volume of loans that can be issued at or above 4.5 times the borrower's annual income to 15% of new residential mortgage approvals.

The FPC has also requested new powers over buy-to-let mortgage lending, which the government said it intended to consult on separately early in the next parliament. This consultation exercise will attempt to collect evidence on whether and how the existing buy-to-let market may carry risks to financial stability, the government said.

The same legislation containing the FPC's new powers over the housing market will also give it control over the leverage ratio framework, which refers to the amount of capital banks must hold as a proportion of their total assets without weighting for risk. Because it is a more straightforward calculation, the leverage ratio is considered less vulnerable to manipulation than traditional measures of the loans and other assets on firms' books. Currently, the FPC can only make recommendations about the leverage ratio. Late last year, it recommended that firms be required to hold capital worth up to 4.95% of assets by 2019.

Central banks in many other countries currently hold similar powers over the housing market and banking industry, the UK government said. Countries including Canada, New Zealand and Norway already operate loan to value limits; while the Netherlands, Switzerland and the US have already introduced leverage requirements for their major financial institutions.

City minister Andrea Leadsom said that "acting now" would help to protect the UK from "any financial shocks in the years to come".

"Building a stronger and safer financial system is a key part of our long-term economic plan," she said. "That's why we put the independent Bank of England back at the centre of ensuring emerging risks to financial stability are identified, monitored and effectively addressed, and it's why we've been clear that the bank should have the tools it needs to do this important work."

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