It is a difficult circle to square:
Ministers want banks to be responsible and risk-averse. They also want them to provide more loans for families and businesses.
The two are contradictory.
We had another insight into this puzzle this morning when the FSA, Lord Myners and John Healey (housing minister) were up in front of the Treasury Select Committee.
You may remember that Gordon Brown wants to ban 100 per cent mortgages. (“A new era of responsible lending“). The prime minister has asked the FSA to examine the issue. The watchdog is putting out a paper in the autumn examining whether mortgage restrictions are a good idea.
But the FSA executives who appeared this morning at the committee seemed far from enthusiastic about setting restrictions on loan-to-value or loan-to-income ratios.
Jon Pain, managing director of retail markets for the City watchdog, said that imposing “caps or collars” on mortgage lending based on income or deposit ratios could be a crude tool for measuring affordability.
Instead, lenders had more sophisticated ways to work out whether a household could repay a home loan, Mr Pain said. Assessing a loan on the basis of income versus mortgage was a “superficial” ratio, he said.
Mr Pain said that the level of a household’s disposal income – after paying mortgage payments – was a more appropriate figure than loan to value or loan to income ratios. (An argument used by many lenders in recent years to justify their more “liberal” lending practices).
Meanwhile another FSA executive, Leslie Titcomb, argued there were concerns about the potential impact on first time buyers.
“We are also concerned that having a fairly blunt tool like a cap on loan to values could have an effect of denying first time buyers access to the market, which would be unfortunate,” she told the committee.
Maybe I’m over-interpreting here but that seems pretty clear…..no ban on 100 per cent mortgages or banks lending six times your salary.
Sally Keeble, a Labour member of the Treasury select committee, said the comments proved that there was a “clash” between the two arguments.
“I’m fairly certain there is a clash about what the government wants to do,” she told the FT. “On the one hand, they want to see prudent lending, which argues for tight controls on loan to value ratios, on the other, they want people to be able to get loans.”