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Turner: Europe must give states right to cap LTVs

Europe must give member states the right to macro-prudential levers such as loan to value caps if the UK is to avoid future property booms and busts.

Sarah Davidson, 27 April, 2012

Speaking last night at the Central Bank of Ireland Conference Lord Adair Turner, chairman of the Financial Services Authority, said there were some areas of financial policy where a high degree of national autonomy, subject to some appropriate central coordination, is essential.

He said: "We need macro-prudential levers and need to be able to pull them at national rather than eurozone level."

Turner said credit and property price booms can create enormous economic volatility and harm and cannot be contained by interest rate policy alone – in boom times the interest rate elasticity of credit demand is too low.

He warned that putting up interest rates a few percentage points will not deter borrowers who expect property price rises of say 10% or more while putting them up many percentage points could seriously harm other sectors of the economy long before the property credit boom slows down.

He said: "We therefore need new policy tools, other than the interest rate, to take away the punch bowl before the party gets out of hand.

"Tools such as countercyclical capital requirements, capital risk weights which can be varied by broad sector, or maximum loan to value or loan to income ratio limits imposed on borrowers."

Turner said even in non-euro area countries such as the UK, which still sets its own interest rate, these tools are essential.

Indeed the Interim Financial Policy Committee of the UK recently gave advice to government on what directive powers should be included in forthcoming legislation.

Turner added: "But for countries within the eurozone unable to vary their own interest rate the need is still greater and the tools need to be deployable at national rather than eurozone level."

Turner said small countries with large banking systems, such as Ireland, need to be free to impose higher capital requirements on banks than required by the Basel III/CRD IV since that may be essential to reassure bank counterparties.

He added that since past credit and real estate booms have been concentrated in specific countries of the eurozone – massive in Ireland from 2004 to 08 but almost entirely absent in Germany – countercyclical tools such as variants in capital requirements or risk weights must be available to be pulled at a national specific level.

Turner said: "It is therefore essential, as the European Systemic Risk Board has recently made clear, that the forthcoming CRD4 directive and regulation leaves appropriate discretion at national level."

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2 Comment(s)

Mike wrote:

Does he know nothing of how property values rise. Its not the LTV but the income multiples and affordability that set housing prices. If you limit the amount that can be borrowed based on affordability and income, you limit the amount that can be paid for a property and hence stop spiraling prices. 100% LTV is fine, providing the monthly payments are affordable but even a 50% LTV is wrong if the monthly payments are 'unaffordable'. The only protection here is to the lender on re-posession, the borrower is excluded from purchasing due to having to save high deposits. The property market, the life blood of financial services will continue to stall and recovery from the current recession will be held back.Property price rises of 10% are easily sustainable based on income multiples. eg. if pay awards go back to say 3% pa and the income multiple is 3-4 salary, that means that the purchaser has 9-12% additional purchasing power. So the affordability is maintained and the 10% desire of property value increase is easily maintained. So a 'win-win' for all. get down of your 'in the cloud' observations and look at the real world!

Friday, April 27, 2012 11:17:44 AM GMT

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George Williamson wrote:

Lending on LTV is CAVE MAN lending it is that outdated. Can somebody please tell Mr Turner that FIRE has already been invented! Mike should be made Chair of the FSA as his comments are spot on.

Friday, April 27, 2012 1:52:21 PM GMT

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