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Move part of radical shake-up of banking regulations
City watchdog the Financial Services Authority (FSA) is preparing a clampdown on risky mortgage lending by placing limits on the size of the loans offered to British homebuyers in a hard-hitting review of banking rules due this week.
Lenders, which during the boom offered 'extreme loans' of five or six times borrowers' salaries or more than 100 per cent of a property's value, could now be forced to impose strict limits on how much debt they allow homebuyers to take on.
Such a move will mark a radical break with the highly liberalised mortgage markets that evolved over the past decade and would help to make a repeat of the credit-fuelled house price bubble far less likely, though some borrowers may find it harder to buy the property they want.
Adair Turner, the chairman of the FSA, will outline plans for an over-arching shake-up of banking regulations to prevent a repeat of the credit crisis in a discussion paper on Wednesday. He is expected to lay out a broad sweep of reforms to prevent banks from taking risks that could push the finance industry back to the brink of collapse.
Mortgages up to four times bigger than customer income, or sold with loan-to-value ratios of 120%, became commonplace in 2006 and early 2007. Northern Rock, Halifax and Abbey sold the mortgages, many of which fell into negative equity or resulted in home repossessions.
Northern Rock has admitted that the largest proportion of its repossessed homes have resulted from its Together mortgage, which allowed customers to borrow 120% of a home's value.
Turner is expected to argue that many of the rules intended to maintain the health of the financial system actually had the reverse effect, and worked to destabilise the markets and encouraged risky behaviour. He will recommend the reform of regulations governing how much capital is maintained by banks in case of an economic downturn, and the more realistic pricing of financial products. He has already signalled that he favours banks keeping larger amounts of capital in boom years and less in times of recession, much like the Spanish model that allowed Abbey and Bradford & Bingley owner Banco Santander to survive without government aid.
He is also expected to call for a review of accounting rules that force banks to value their assets at the current market price. Many bankers have argued that the rules added to their problems when derivatives markets froze and it proved impossible to price the exotic financial instruments they used to finance mortgage lending.
One senior banker said Turner wanted to usher in an era of responsible lending without killing the mortgage market or preventing firms from devising flexible products that could accommodate customer demands. "We can't fix the system in aspic. Turner knows that for London to remain a premier financial centre, there must be room for manoeuvre," he said.
Banks and insurers have spent recent months lobbying the regulator to head off strict rules on the sale of financial products. They believe a draconian clampdown will stifle innovation in the City.
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