Bank limits future property booms with new rules

BANKS offering large home loans that risk fuelling a future housing boom will have to hold extra capital to keep the financial system safe, the Bank of England said yesterday.

Britain’s weak economy makes a credit boom look a distant prospect for now, but the central bank and the UK government are already putting in place rules to stop lending destabilising the economy in future.

Prior to the crash, many lenders offered mortgages covering almost all the value of the property, while in some cases borrowers were not required to provide evidence of their ability to repay the loans. These practices catered for an almost obsessive demand for home ownership.

The Bank’s financial policy committee (FPC) stopped short of asking for powers to directly regulate how much of a deposit home buyers should put down, saying more debate was needed.

Starting in April, the FPC will get broad powers to regulate how much credit is flowing into the economy and to clamp down on potentially destabilising hotspots in sectors such as property.

The tougher rules might slow growth during a future credit expansion, the FPC said, but it insisted they would bring long-term benefits by reducing the chance of another financial crisis which
could require taxpayers to shore up banks.

“If these tools are successful in reducing the likelihood and severity of financial crises, their use is likely to boost the expected level of UK GDP,” the Bank of England said.