Banks to face higher mortgage capital requirements as house prices rise

Banks to face higher mortgage capital requirements

Chris Whitney

The Bank of England is set to raise the cost to banks of making new large mortgages in an attempt to stem house price rises. The Daily Telegraph has reported that ‘fears over a house price bubble in London and the South East’ mean that the Bank is set to increase the capital requirements on residential mortgages.

While this type of measure is common in other countries it is likely to cause controversy if implemented in the UK and could cost banks billions of pounds.

BOE is set to directly intervene to slow down high value mortgage lending for the first time

The Bank of England’s Financial Policy Committee (FPC) is set to copy a similar move by the Swiss regulator and increase the capital requirements on residential mortgages, according to analysts at Deutsche Bank.

In a report, analysts at the German investment bank said they expected the FPC to lift the minimum capital weight on UK home loans from 15 percent of their value to 20 percent in an attempt to dampen house prices.

The Daily Telegraph reports that this would mark the first time the Bank of England has directly intervened to slow down the growth of large mortgage debt in the banking sector and would be seen as a way of avoiding a more painful rise in interest rates.

The Deutsche Bank report said: “We think the impetus here will be as much to take some heat out of the London and South East housing market as to show action in the face of a rapidly recovering domestic economy which can’t really afford higher interest rates.”

Increase in mortgage capital requirements likely to be controversial

The FPC was created as part of the coalition’s reform of British financial regulation and the 10-strong committee is chaired by Mark Carney, the Governor of the Bank of England.

Since taking over as Governor in 2013, Mr Carney has sounded warnings about the property market. In November the Bank of England scrapped its Funding for Lending programme to support lenders making new home loans, concentrating the initiative on business lending.

According to Deutsche Bank, if the FPC were to vote for an increase in the capital requirements on UK mortgages it could cost Lloyds Banking Group, Britain’s largest provider home loans, about £1 billion in extra capital and a further £1.45 billion for the country’s other major banks.

Regulators in other countries frequently use this type of capital measure to control house prices. In Hong Kong the use of higher capital charges on mortgages is the main tool used by the authorities to control the province’s property market.

However, the use of such a policy to limit mortgages in the UK could prove controversial.  Michael Cohrs, a former senior banker and until last year a member of the FPC, said in 2012 that to “take away the punch bowl” to end an “electorally-popular credit boom” could prove controversial.

Mr Cohrs said: “To make a success of financial policy the FPC must be empowered to take decisions which are enforceable and which will have a real impact.”