More Bank of England powers to curb housing bubble

Much has been made of the powers of the Bank of England's new Financial Policy Committee to deflate a housing bubble before it threatens disaster for the banking system and the economy.

And with signs that there is already overheating in the London housing market, which may be spreading elsewhere, these powers suddenly seem - well - quite useful.

But in practice what the FPC can do to curb dangerous lending is perhaps a bit constrained and indirect.

So, for example, the governor of the Bank, Mark Carney, has made clear his concerns that some banks are providing mortgages that are too great a multiple of a household's earnings - such that as and when interest rates rise, those mortgages would become unaffordable.

Which would be bad news for the borrower, who would be in difficult financial straits, for the bank lender, which might incur losses, and for the economy (if banks collectively incurred such big losses that their capacity to lend was reduced).

Right now, the Financial Policy Committee has the ability to recommend to the relevant regulators, the Prudential Regulation Authority and the Financial Conduct Authority, that they should force banks either to ration high loan-to-income mortgages (by stipulating that they should be a specified low proportion of all mortgages) or to ban very high loan-to-income mortgages.

In practice, the regulators would probably do what the FPC asks, but they do have discretion to say no.

Tonight therefore the Chancellor is announcing, in his Mansion House Speech, that the FPC is unambiguously the boss of the regulators, by giving it the power to order these curbs on lending, rather than just propose such curbs.

This power of instruction would extend as well to loans that are a high proportion of the market value of a house - although such high loan-to-value mortgages do not seem to be today's problem.

In other words, the FPC will henceforth unambiguously have the ability to take the heat out of the housing market.

We will learn later this month whether it is choosing to employ these powers right now.

PS: George Osborne will also make it clear that these powers for the Bank of England to rein in risky mortgage lending will equally apply to mortgages insured by the Treasury's controversial help-to-buy scheme.