Government confirms new powers for Bank of England to guard against future financial risks
This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
The Bank of England's Financial Policy Committee (FPC) is to have new powers over the housing market and a leverage ratio framework for Britain's banks.
The government has today (2nd February 2015) confirmed that the Bank of England’s Financial Policy Committee (FPC) will have new powers of direction over the housing market and a leverage ratio framework for Britain’s banks, to guard against any future risks to financial stability.
City Minister Andrea Leadsom confirmed that the FPC will be given new tools to ensure the ongoing stability of Britain’s housing market through setting limits on debt to income ratios and loan to value ratios for mortgages. The FPC recommended it be given these powers after the Chancellor announced his intention in his 2014 Mansion House speech to give the FPC the necessary powers to tackle future housing market risks.
The City Minister also confirmed the FPC will be given powers of direction over the new leverage ratio framework for Britain’s banks.
Currently the FPC can only recommend these policies, but the government has been clear that it is keen to work with the FPC to ensure it has the powers it needs to safeguard the stability of Britain’s financial system, on which businesses and families across the country depend.
The government’s announcement today follows separate Treasury consultations on granting the Bank of England additional powers to address any emerging risks to financial stability from the housing market and from excessive leverage in the banking system.
Chancellor George Osborne said:
Today we’re confirming that the Bank of England will have further powers to safeguard the stability of Britain’s financial system from any future risks posed by our housing market or banks.
Curbing Britain’s age-old vulnerability to banking and housing booms is one of the goals I recently set for the next two decades of Britain’s economic policy, and today’s announcement of new powers for the Bank of England – which we’ve put back at the heart of safeguarding financial stability – shows our determination to achieve this.
It’s part of a formidable agenda for economic policy over the years ahead, a long term economic plan for Britain that delivers for hardworking people.
City Minister Andrea Leadsom said:
Building a stronger and safer financial system is a key part of our long term economic plan. That’s why we put the independent Bank of England back at the centre of ensuring emerging risks to financial stability are identified, monitored and effectively addressed. And it’s why we’ve been clear that the Bank should have the tools it needs to do this important work.
Today we’re confirming that the government will grant the Bank additional powers to guard against future risks. By acting now, we’re helping to protect families and businesses up and down the country from any financial shocks in years to come.
The additional powers over the housing market are commonly held by the Bank’s counterparts in other countries. Loan to value limits are used extensively in countries including Canada, New Zealand and Norway. Several other countries, including the Netherlands, Switzerland and the US have already introduced leverage requirements for systemic firms.
The legislation being published today sets out the new powers of direction that the government will grant the FPC over loan to value limits and debt to income limits for owner-occupied mortgages, as requested by the FPC in October 2014.
The government intends to consult separately early in the new Parliament on the FPC’s recommendations for it to have new powers over the buy to let market, with a view to building an in-depth evidence base on how the operation of the UK buy-to-let housing market may carry risks to financial stability.
The legislation being published today also sets out the new powers of direction the FPC will be given over the new leverage ratio framework for Britain’s banks.
In 2013 the Chancellor asked the FPC to assess what is the full set of powers it needs in relation to the Leverage Ratio. Last year, the FPC published a Leverage Ratio Review which made a strong, evidence-based argument for the FPC to be given new powers to set the leverage framework applying to the UK banking sector. The government accepted the FPC’s recommendations in full and consulted on a proposal for legislation in this Parliament.