Skip to main content

Preventing Bank-Credit-Fuelled Housing Booms

The Chancellor of the Exchequer is giving new powers to the Bank of England to help dampen the current and future housing booms (Guardian coverage here). The Bank will in essence be able to limit mortgage lending and set constraints on the size of loan-to-value ratios or income-to-loan ratios. There are also plans to build more more homes to address the shortage of homes in the south-east of England. Mark Carney in his Mansion House speech (see video below) states the Bank is not interested in targeting asset prices or bursting bubbles, but they are interested in constraining excessive build-ups of debt and leverage.

Bank of England constraints on bank credit existed from the Second World War until the 1970s. In particular, there were quantitative and qualitative constraints on lending to the property and other 'speculative' sectors. I discuss these credit constraints and how they enhanced banking stability in a chapter in my forthcoming book.

Popular posts from this blog

The Failure of Herstatt Bank

As an undergraduate, I was taught about the failure of Herstatt Bank in 1974 and Herstatt risk. This bank was only the 35th largest bank in Germany at the time so why would anyone be interested in studying its failure? Herstatt failed because of its involvement in risky foreign exchange business. When it closed its doors on 26 June 1974, counterparty banks (mainly in New York) had not received dollars due to them because of time-zone differences - this is known as settlement risk. The cross-jurisdictional implications of its failure resulted in the Bank for International Settlements setting up the Basel Committee on Banking Supervision and Herstatt's failure was a key reason for the establishment of real-time gross settlements systems, which ensures that payments between two banks are executed in real time. The Bank of England's Ben Norman has an interesting post on Herstatt over at the Bank's new blog ( Bank Underground ). As well as giving an excellent overview of

Boom and Bust: A Global History of Financial Bubbles

Boom and Bust: A Global History of Financial Bubbles, co-authored with my colleague Will Quinn , is forthcoming in August. It is published by Cambridge University Press and is available for pre-order at Amazon , Barnes and Noble , Waterstones and Cambridge University Press . 

The Great Depression

Marginal Revolution University has a great video on the Great Depression.