British banks offering over-generous home loans that risk fuelling a future housing boom will have to hold extra capital to keep the financial system safe, the Bank of England said on Monday.
Laws currently going through Britain's parliament will give the Bank of England's Financial Policy Committee (FPC) wide-ranging powers, and on Monday the FPC said more about how these would work in practice.
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The FPC said tougher rules could slow growth during a credit expansion, but would be of long-term benefit by reducing the risk of a future financial crisis which could require taxpayers to shore up banks.
"If these tools are successful in reducing the likelihood and severity of financial crises, their use is likely to boost the expected level of UK GDP," the committee said in a draft policy statement.
"The best available studies point, on average, towards only a modest negative impact on near-term growth if (capital requirements) are tightened."
The BoE's Monetary Policy Committee could have lower interest rates than otherwise "to cushion the impact on growth" if tighter credit rules lowered the outlook for inflation, the report said.
Last year the FPC said it wanted two key powers, among others, to require banks to raise and lower capital ratios over the course of an economic cycle, and also to impose capital surcharges on risky areas of lending like some property loans.
Property booms and busts have been behind many of Britain's economic downturns over the past few decades and the central bank hopes that the new tools will stop Britain's property market from getting overheated in future.
Monday's policy statement sets out the indicators that the FPC would use to check on the health of Britain's lending market.
These include ratios of house prices and commercial property prices to rents, how large a deposit new borrowers need as well as broader measures of how rapidly banks are increasing other types of lending.
It may be some time before the FPC feels a need to tighten rules, however.
Current mortgage approval levels are far below those seen before the financial crisis unfolded in 2007-2008, and in August the BoE launched a Funding for Lending Scheme aimed at boosting lending to home-buyers and businesses.
(Reporting by David Milliken and Huw Jones)