The Brits appear to understand the danger of having an outside and uncontrolled banking sector relative to the size of their economy. So if it’s too hard to attack TBTF directly, the next best is to put (or be able to put) hard constraints on banking.
This proposed authority for the Bank of England is much simpler and likely to prove more effective than some of the rules being finalized in the US (where minor changes in wording buried in lengthy provisions can substantially weaken the initiative). Of course, it does not hurt that the Bank of England has institutional memory of what effective regulation looks like.
From the Telegraph:
The Bank and its Governor, Mervyn King, would be able to prevent banks from lending too much, or to over-extended customers, if they judge that this would destabilise the economy.
The precise details of the controls the Bank is to be given will be detailed fully at a later date.
However, they are likely to include restrictions on the loan-to-value ratios offered to customers. For instance, families could be prevented from taking out a mortgage for anything more than 75 per cent of the value of their home….
Mr [Chancellor George] Osborne’s “toolkit” is also likely to include broader restrictions on lending to businesses.
The controls, which could be applied either to specific institutions or to the entire mortgage industry, will vary over time as the economy ebbs and flows.
Critics will suggest it marks a significant shift from free market policies towards 1970s-style controls on financial institutions. They bear some resemblance to the rules in place in Hong Kong and China, where regulators have been credited with using them to prevent housing bubbles.
Under Mr Osborne’s scheme, the Bank of England will become a significantly more powerful body than it was under Gordon Brown.
The Governor will have the power to impose specific restrictions on banks if he deems it necessary, though his main role will be to warn when he fears the economy is becoming overheated or at risk of collapse.
Whereas previously the only power at the Bank’s disposal was to move interest rates, the new tools will provide an extra level of control over the financial system.
The article indicates that the FSA would continue to exist, but much of its current mandate would be moved to the Bank of England and a new consumer protection agency. What remains would become largely subordinate to the Bank of England.
The US did this 16 years ago with HOEPA (Home Ownership and Equity Protection Act of 1994). Hopefully though the BoE will actually use it’s regulatory powers.
This has been a reminder that any and all claims, generally self made, that the Fed lacked regulatory power over mortgages is complete bovine excrement. Tell me again why anyone thinks the Fed is a good place for more regulatory power. Oh yeah, because they won’t use (except to help banksters).