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Govt consults on Bank of England powers to cap LTVs

Bank of England BoE Bank 480

The Government has today launched a consultation on the macro-prudential powers that could be given to the Bank of England’s Financial Policy Committee, including the power to cap mortgage loan to values.

In its paper, The Financial Services Bill: the Financial Policy Committee’s macro-prudential tools, the Treasury is consulting on which tools the FPC should have to ensure stability.

The paper is being launched in response to FPC recommendations to the Treasury in March concerning appropriate tools.

In February, chancellor George Osborne came out in favour of the FPC having the power to cap LTVs, which also received backing from the International Monetary Fund.

In March, the FPC recognised a cap had benefits in terms of securing stability but argued its impact is too important to be used without a mandate from parliament.

Today’s consultation states: “The Government notes that other countries’ experiences of tightening mortgage terms and conditions – including setting maximum LTV/LTI ratios – suggest this had been a somewhat effective way to limit financial instability.

“However, this tool has rarely been implemented in isolation from other measures, such as mortgage insurance. The Government also notes that this type of requirement can prevent borrowers who would otherwise be considered creditworthy from receiving mortgage financing.”

Other tools being consulted on include the power to impose counter-cyclical capital buffers, sectoral capital requirements and the power to set a leverage ratio cap once international rules are in place.

New Treasury financial secretary Greg Clark says: “In establishing the FPC, the Government is creating a strong, macro-prudential authority that will identify and address potential risks to stability in the financial system. But to be effective it must have the appropriate tools.”

The FPC is being created by the Financial Services Bill and will have the power to issue directions to the Prudential Regulation Authority and Financial Conduct Authority using the macro-prudential tools it is given by the Treasury.

The interim FPC first sat in June 2011 and meets quarterly within the Bank of England, chaired by the governor. It last met on 14 September with the minutes of the meeting published on 24 September.



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  • Mike 18th September 2012 at 10:14 pm

    By limiting LTV the only protection this is going to give is to the lender. A far better solution is to ensure affordability. As long as the borrower can afford the monthly payments there should be no problem and by limiting income multiples, there shouldn’t be out of control spiraling property price increases. LTV means very little as someone could have a 50% mortgage but the monthly mortgage payment could be unaffordable. On the other hand, a borrower could have a 95% mortgage and the monthly mortgage payments easily affordable .Its quite a pity that the FPC don’t live in the real ‘normal’ world but operate in the lofty towers of ‘Eaton Land’!

  • Mark 18th September 2012 at 2:40 pm

    I smell the death of Shared Ownership – about time too.