Banks will be told how much capital they should hold by a new independent Bank of England committee under plans put forward by the government to prevent another banking crisis.
The Financial Policy Committee would also be able to set the value-to-loan ratios on mortgages offered to homeowners, chancellor George Osborne told the House of Commons.
The committee’s sweeping powers were announced as part of the Financial Services Bill, which is designed to prevent credit bubbles being built up, as happened in the lead up to 2008’s meltdown.
Osborne said the committee element of the Bill, which received an unopposed second reading, would “affect the bread and butter of people’s daily lives”.
Labour’s shadow chancellor Ed Balls claimed the Bill fell “well short in its current form of being fit for purpose”, but added that his party wanted to contribute “constructive proposals”.
The governor of the Bank of England would serve as the chair of the committee, which would be tasked with moderating a credit boom and alleviating a credit bust, Osborne told MPs.
It would be able to “alter the maximum loan-to-value ratios in mortgage lending to curb a sharp, unsustainable rise in house prices”. The committee would be entirely independent of ministers.
The Bank would be the “single point of accountability for financial stability, ensuring there is a decisive answer to the question about who is in charge”, he told MPs. The committee would be “entrusted with the stability for the whole financial system”, Osborne said.
He continued: “Its job will be to identify bubbles as they develop, spot dangerous interconnections, warn about poorly understood financial instruments and take action to stop excessive levels of debt building up before its too late.”
The chancellor added: “I freely accept that we are largely in uncharted territory in policy making here or indeed anywhere in the world. I am aware that lots of other jurisdictions are considering these types of things but I think we are ahead of many jurisdictions.
“But surely the experiment of making no attempt to moderate the credit cycle, let the bubbles grow and burst and then clean up afterwards, has been an unmitigated disaster and I think we would be failing if we didn’t look for an alternative approach.
“These are very important tools that we are going to give this body which have a real impact on our constituents about the kind of house they are able to afford on the income they have got.”
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