BOE to Assess Loan-Limit Impact as It Monitors Housing Risk

The Bank of England plans to assess the potential impact of having the power to limit loan-to-value ratios on mortgages as part of measures to prevent the build-up of financial-stability risks.

At its Nov. 20 meeting, the BOE’s Financial Policy Committee said it could apply tougher capital requirements on lenders or recommend that regulators curtail the availability of some home loans.

“The committee discussed the experiences of other countries in using some of these tools and requested a fuller assessment from Bank staff of the potential impact of these instruments,” the FPC said in the record of the meeting, released today in London. “The committee agreed it would closely monitor housing-market indicators.”

The record follows the FPC’s decision last week to end incentives for mortgages under the BOE’s Funding for Lending Scheme. The changes, which came amid a strengthening property market, mean FLS allowances will only apply to business loans from 2014 and won’t be available for household borrowing. Regulators will also end a measure that allowed banks to not hold capital against mortgages granted under the program.

House Prices

“They are still trying to build out their framework and emphasizing that they don’t want to let a full housing bubble take hold,” said Philip Rush, an economist at Nomura International Plc in London. “I don’t think they will impose any other measures of sufficient substance to prevent the brisk house-price growth that we predict over the next couple of years.”

U.K. house prices rose in all regions of the country for the first time in more than six years in November as low mortgage rates helped the property revival to broaden, Hometrack Ltd. said yesterday. Values across England and Wales increased 0.5 percent from October and jumped 3.8 percent from a year earlier, the most since October 2007.

The FPC also said it would put back any full assessment of an “appropriate” leverage ratio until there was a common international definition. The panel will return to these issues “once an international agreement on the definition of the leverage ratio had been reached,” it said.

At the meeting, the panel also discussed banks’ use of internal models to determine the risk weights they use when measuring capital needs. The FPC asked the Prudential Regulation Authority to review getting firms to use a standardized approach and report back in the first quarter of 2014.

In the record, the FPC repeated comments from its Nov. 28 Financial Stability Report, saying a “sharp rise in interest rates could test financial-system resilience.” The FPC recommended on Nov. 28 that the Financial Conduct Authority, the U.K.’s markets watchdog, require banks to stress test borrowers’ ability to cover mortgage payments if rates rise.

To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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