The Bank of Englands (BoE) deputy governor for financial stability Paul Tucker said this week that the government not unelected officials should be the only institution with the power to limit mortgage borrowing. The BoE has been criticised recently for failing to ask Westminster for more power to limit loan-to-value (LTV) ratios on mortgages. Critics believe such a move while politically unpopular is an effective way of preventing economic bubbles. However, Mr Tucker said in a Financial Times article today that such Selective capital controls had not been seen in the UK since the 1970s and should not return now. Outright bans on households taking out loans with high LTVs including banning families borrowing from outside the UK financial system would, in the view of many of us, be a matter not for the FPC but for government to pursue directly, he argued. Instead of such mortgage controls, the Bank’s financial policy committee has asked the Treasury for power to discourage lending in certain sectors like property by raising the minimum amount of capital that banks must hold against loans. This would not cut across lenders judgments on the creditworthiness of individual borrowers in a way that imposing limits on mortgage LTVs would, Mr Tucker said. The BoE deputy added that the committee agreed that LTV limits did have certain benefits compared to other measures, not least that by using them, the Bank would send a clear and strong public signal of emerging risks. Despite this, he insisted that setting such limits would in themselves be difficult because the sustainable level of property prices is not itself clear.
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