Wednesday, December 11, 2013

Bank of England pulls back on support for home loans


The Bank of England plans to cut its support for mortgage lending in the U.K. and nudge banks towards lending more to small businesses, it said Thursday, November 28.

The move is an answer to increasing concern that a speedy pickup in housing market activity in Britain could ultimately turn unpleasant, affecting banks and borrowers, and also as longstanding worries that small firms are being starved of credit, hindering economic recovery.

What’s more, it is a sample of the growing willingness of central banks across the globe to organize customized policies to maneuver their economies, rather than relying exclusively on official interest.

The BOE said in its twice-yearly financial stability report that although there is little evidence that quickening activity in Britain’s housing market poses an immediate threat to financial stability, “risks may grow if stronger activity is accompanied by further substantial and rapid increases in house prices and a further buildup in household indebtedness.”

The central bank said property has played “a central role” in many previous economic and financial crises. In the U.K., real estate accounts for 70% of non-financial assets.

House prices in the U.K. have climbed speedily in past months, formed worries over the materialization of a new bubble in prices. A government mortgage-support program for would-be homebuyers called Help-to-Buy had pave the way for a boost in mortgage lending, together with an increase in the number of riskier loans on offer that entail merely a small down payment.

The BOE said that in response to the pickup in housing-market activity and an ongoing dearth in small-business lending it has decided to overhaul its flagship Funding-for-Lending Scheme, or FLS, which offers banks cheap cash provided they use it to dish out loans to households and businesses.

Banks drawing on the FLS will from January no longer benefit from reduced capital requirements on new mortgage loans, the BOE said. On the other hand, capital relief will carry on for small business loans. Banks engaged in small business lending will also pay a smaller flat-rate fee of just 0.25% to use the FLS and will be able to draw more cash from the facility, the BOE added.

The changes were settled with Chancellor of the Exchequer George Osborne.

“Now the housing market is starting to pick up, it is right that we focus the scheme’s firepower on small businesses,” Osborne said. BOE Gov. Mark Carney said extra support for mortgage lending is “no longer needed.”

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