Turner calls for high LTVs to be curbed
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Lord Adair Turner, chairman of the Financial Services Authority, says new macro prudential policy tools are needed to manage potentially unstable cycles of credit, which could include limits on maximum LTVs.
Speaking at a lecture at the CASS Business School in London last night, Turner says we need “new tools to take away the punch bowl before the party gets out of hand.”
He says this could include measures to focus on direct borrower policies, such as maximum limits on LTV ratios, applied continuously or varied through the cycle.
Turner says credit can play a part in driving asset price cycles, which in turn can drive credit supply in a self-reinforcing and destabilising process.
Turner warns that using a ‘one size fits all’ policy approach to curbing asset price bubbles in commercial or residential real estate could have the unintended consequence of restricting credit to other real estate sectors of greater economic benefit.
He says: “There is, therefore, a danger that at some points in the credit/asset cycle, appropriate actions to offset the economic and financial stability dangers of exuberant lending will tend to crowd out lending which funds productive investments”.
Tuner says the financial innovations of complex securitisation and credit derivatives may, if purged of their excesses, have potential to improve bank risk management, but the pre-crisis argument they created major economic efficiency benefits was hugely overstated.
He says: “We need to recognise that securitised credit can increase the volatility of supply: so macro prudential tools, therefore, need ideally to be able to constrain securitised credit markets as well as on-balance sheet credit.”
Turner says we need a new philosophical approach to “market liquidity” which recognises that market liquidity is beneficial up to a point but not beyond that point, so that more liquidity, supported by more trading, is not always necessarily beneficial.
He says: “This implies a bias to conservatism in our setting of capital requirements against trading activity: it reinforces the case for limiting via capital requirements the extent to which commercial banks are involved in proprietary trading; and it may argue in favour of financial transaction taxes.”
He adds: “There are very important advantages and risks created by extensive mortgage credit supply, which need to be taken into account in decisions about bank capital and liquidity.
“But the optimal resolution of this balance has no necessary implications either way for the overall level of investment and growth in the economy, on which discussions of the impact of capital adequacy regimes frequently focus.”
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Readers' comments (6)
Anonymous | 18 Mar 2010 2:06 pm
This obviously lacks detail, but surely it cannot be argued that the sentiment is incorrect. Can it?
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Paul Silcox | 18 Mar 2010 2:31 pm
Good good. All we need now is a cap on income multiples of around 3 - 4 , affordability criteria measured against 8% interest rates and cross-checking stated-income against tax returns and we will be sorted, never to have a housing bubble unleashed on UK citizens ever again. Where do I sign up?
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Anonymous | 18 Mar 2010 3:33 pm
Of course it lacks detail, but the detail is all there on the FSA website speeches section, all 31 pages and 63 slides!
The writing is, as they say, on the wall.
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Grey Haired Underwriter | 19 Mar 2010 9:51 am
What a typical load of drivel from another 'civil servant; who probably doesn't actually know what the definition of a mortgage is. The FSA has to learn that the bulk of the institutions that created the problem either no longer exist or are under State Control. If the FSA carry on trying to 'bolt the stable gate....' they are going to set back our Society by about 40 years. The granting of 100% mortgages is not per se a bad piece of lending. It isn't the loan to value that causes arrears but the quality of the applicants. The fact that some lenders decided to be less discriminating and paid the price should not mean that future generations should be condemned to renting a house. It might be useful for him to consider that our home owning democracy has provided the public with an asset that affords them security in old age and which at the present time gives the Governnment a nice little earner in terms of inheritance tax and to cover the costs of long term elderly care.
Perhaps these people from the FSA should actually have some real time experience in the market they are trying to regulate. It will be interesting to see if any of their new recruits will be taken from the former broking, mortgage admin, underwriting people that their original failure put out of work. Perhaps then they would speak with some authority and drive regulation to where it should be.
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Anonymous | 19 Mar 2010 10:57 am
A tremendous piece of nonsense by Lord Turner. I doubt if the Lord has ever needed to apply for a mortgage in his life so would not understand how it works. As for the complicated financial innovations, I wonder how much he and other privileged members of society have invested in these over the years. I very much doubt that if they had, the nature of how profits were generated was ever at the forefront of their minds. Grey Haired Underwriter is correct, there is no way of classing a particular product as bad, in the same way as sub prime cannot be classed as all bad. Sensible lending is required, not a one box fits all approach. If mortgages are not available to everybody who can prove their ability to repay them then the housing market will never recover. It was out of hand previously but there needs to be some middle ground. We cannot go from one extreme to the other. The argument that we never had sub prime before does not wash. We used to travel by horse and cart so why not do away with the car? It was never needed before!!
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Anonymous | 19 Mar 2010 11:22 am
I'm sick of these clueless bureaucrats who are paid huge salaries at our expense, and who are sitting so high in their ivory towers that the real world to them is a fuzzy dot somewhere below the clouds.
Maybe they should just ban mortgages completely so the only way you can buy a house is to save up - how does that sound Lord Turner ? Is that safe enough for you ?
Idiot.
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