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Bank of England set to crank up pressure on lending requirements

Banks will have to hold higher capital if they sell risky loans

The Bank of England will be given new powers to prevent boom/bust cycles in house prices that have so damaged the economy in recent years. The Financial Policy Committee will, from April, be able to force banks to hold more capital against mortgages with high loan-to-value ratios, or a high loan-to-income ratio if they believe there is a risk of mass defaults. This is to prevent a re-emergence of “sub-prime” mortgages which were sold to home buyers who couldn’t really afford the loan they took out.

However, there are fears that this may be another blow to an already struggling housing market. Prices broadly flatlined during 2012 and fell in many parts of the country, especially outside the South East. The Royal Institution of Chartered Surveyors (Rics) predicts the number of house sales in 2013 will jump. House sales are currently well below the peak in November 2006 and despite Rics’ optimism the new requirements may mean that this will not happen. Analysis suggests that a one percentage point increase in capital requirements pushes up the cost of borrowing by 0.25 percentage points and knocks 0.35 per cent off GDP.

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