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Bank under pressure on power to limit loan ratios

The Bank of England could be forced to take on powers that would allow it to limit LTV and loan-to-income ratios.

Last week, the Treasury Select Committee called on the Bank to justify its view that it should not have the power to restrict mortgage lending in this way during housing booms.

The committee is to undertake an inquiry into how the Bank intends to maintain stability and examine why it has shied away from blocking riskier mortgage lending.

Paul Tucker, deputy governor for financial stability at the Bank, recently said that powers to restrict mortgage lending should be limited to politicians and not the Bank.

Chancellor George Osborne is yet to decide what tools to give the Bank’s Financial Policy Committee when it comes into power in 2013 but he is expected to come under pressure from the TSC to give it a full range of powers.

Earlier this month the International Monetary Fund claimed the Bank should have the power to place limits on LTV and LTI ratios.

Andrew Tyrie, chairman of the TSC, says: “The powers of direction provided to the FPC, when used, will affect the terms on which people can obtain mortgages and firms can obtain loans.

“The interim FPC has said that having the power of direction over LTV and LTI restrictions could be beneficial for financial stability. The IMF agrees.”

He adds: “But the interim FPC did not ask for this power on the grounds that the ’use of these tools would require a high level of public acceptability’. That reveals a lot.”

He says the Bank’s reluctance to make such a request suggests they themselves doubt their ability to explain the need for these tools to the public.

Tyrie says: “That is why it is important that we sort out the Bank of England’s accountability to parliament and the public.

“The government’s proposals in the Financial Services Bill simply aren’t good enough.”

He adds: “And we will ensure that the public gets a full explanation from the Bank when they use any of their macroprudential tools. Hence this inquiry.”

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