The Bank of England has proposed a newly-created Financial Policy Committee would be able to demand banks and building societies increase the amount of capital held if fears of reckless lending arise.
The measure, known as sectoral capital requirements (SCR), could be used to target specific sectors such as residential mortgages or even just high loan-to-value mortgages.
The report explained: “The SCR tool would provide a means for the FPC temporarily to increase banks’ capital requirements on exposures to specific sectors.
“For example, if the FPC judged that exuberant commercial property lending posed risks to financial stability, it could increase SCRs on commercial property loans so that banks were required to have more capital against such exposures.”
The draft proposals, which were set out in The Financial Policy Committee’s powers to supplement capital requirements, aim to protect the UK financial system and enhance its resilience in the face of risk.
The SCR tool will apply to banks, building societies and large investment firms, although the number of institutions might increase in future if financial activity “leaks” to unregulated areas.
Giving evidence to the Treasury Committee this morning, Sir Mervyn King acknowledged that no-one liked seeing the interest rate on their mortgages going up and described the powers given to the FPC as an “innovation”.
“There is an element of an experiment and we do not know yet what the public acceptance of the use of these financial instruments will be,” he said.