July 21, 2015

In relative terms, banks finance too much house buying, and too little the job creation needed to serve the mortgages.

Sir, Kate Allen reports: “Last year the BoE introduced tougher mortgage lending rules and warned that a possible resurgence in the country’s pre-credit crunch house price boom risked derailing Britain’s economic recovery’ “ECB easing raises fears on house price bubble” July 21.

But what BoE is not mentioning or doing a lot about, is the fact that allowing banks to hold less equity financing mortgages, than when financing for instance SMEs, means that banks will perceive they can obtain higher risk-adjusted returns on equity when financing mortgages than when financing SMEs; which means banks will, relatively, finance too much mortgages and too little SMEs… or as I prefer to phrase it… too much house buying and too little jobs with which serve the resulting mortgages… and the utilities.