* BoE says to target rapid growth in mortgages or loans
* Slow lending market suggests any action a long way off
* Mortgage industry reacts cautiously to announcement
By Huw Jones and David Milliken
LONDON, Jan 14 British 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 on Monday.
Britain's weak economy makes a credit boom look a distant
prospect for now, but the central bank and the country's
lawmakers are already putting in place new rules to stop lending
destabilising the economy in future.
Prior to the crash, many British 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 replay the loans.
These practices catered for an almost obsessive demand by
Britons to own their own homes.
The 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 on this politically sensitive
Starting in April, the central bank's Financial Policy
Committee (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.
On Monday the FPC said more about how these powers would
work in practice, and what warning signs it would look for
before it orders banks to top up capital buffers so that they
have enough reserves to mop up losses on soured loans in future.
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.
Britain's economy shrank more than 6 percent in a 2008-09
financial crisis and has yet to make up the lost ground, while
its national debt has ballooned by tens of billions of pounds as
a result of the cost of bank bailouts and a shrunken economy.
"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. "The
best available studies point... towards only a modest negative
impact on near-term growth if (capital rules) are tightened."
The impact on growth would be lessened by the fact that
tighter credit conditions would bear down on inflation, allowing
the BoE's Monetary Policy Committee to keep interest rates lower
than they would be otherwise, the FPC said.
Britain's Council of Mortgage Lenders, a trade body for
firms offering home loans, reacted cautiously to the
announcement and said it would examine the plans to make sure
they did not create any inadvertent barriers to home purchase.
The FPC is part of a wider shake-up of Britain's financial
supervisory system which is being formally launched in April,
when the committee's power to require banks to hold extra
capital to cover specific sectors like property takes effect.
The power to force banks to top up their capital because of
too much credit in general will not be available until a new
European Union law on bank capital requirements comes into
force. Negotiations on the law point to a 2014 start.
It may be some time before the FPC feels a need to tighten
Current mortgage approval levels are far below those seen
before the financial crisis unfolded in 2007-2008, and in August
the BoE launched a Funding for Lending Scheme aimed at boosting
lending to home-buyers and businesses.
Nonetheless, property booms and busts have been behind many
of Britain's economic downturns in past decades, and
policymakers have warned that it would be politically untenable
for Britons to have to bail out their banks again.
The FPC set it would keep tabs on ratios of house prices and
commercial property prices to rents, how large a deposit new
borrowers needed as well as broader measures of how rapidly
banks were increasing credit to other areas such as derivatives.
However Mat Oakley, director of commercial research at
property broker Savills, said the FPC might not spot
warning signs early enough if it looks mostly at indicators like
property prices, rents and yields.
"It's going in the right direction, though... I don't think
it will ever be possible to rule out a future property boom,"
All banks, building societies and large investment firms who
are based or operate subsidiaries in Britain will come under the
FPC's scope, but some foreign bank branches will not be covered.
The FPC said it would monitor for "leakages" and recommend
government action to close loopholes if needed. But EU law may
limit Britain's ability to act in some cases.