Lower lending is price of stability, says FSA boss

Restrictions on credit may be unpopular but they are essential, Lord Turner warns
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The hugely controversial failure of banks to increase lending may be a long-term feature of the economy people have no choice but to accept if they want a safer financial system, Britain's most senior regulator said last night.

Lord Turner, the chairman of the Financial Services Authority, said the banks' ability to lend to both consumers and businesses would inevitably be constrained as regulators sought to limit the possibilities of them ever again plunging the global economy into crisis through reckless behaviour.

"Major reform of the global regulatory regime is essential," Lord Turner said in a speech at Mansion House in the City. "At the core of that reform are new capital and liquidity rules which will change the dynamics of credit supply, with consequences that all of society, consumers, politicians and businesses need to understand and accept."

Lord Turner said last week's Basel III agreements, under which banks will be forced to hold more funds as a cushion against unexpected losses, had been a compromise designed to ensure that the financial services industry did not withdraw even more credit. Though critics have attacked the accord as being too weak, the FSA chairman said: "We want much higher capital and liquidity levels in future, but if we introduce them too rapidly, we stymie economic recovery."

Lord Turner also warned would-be homebuyers that they were in future likely to find it harder to get the largest mortgages. "[We must act] if needed to constrain credit booms before they end in busts," he said. New powers for regulators "may need to include limits on allowable contracts, such as maximum loan-to-value ratios", he added.

Such a stark warning from the most senior regulator in Britain will shock those who have accused banks of choking off the economic recovery by refusing to lend more despite the support given to them by taxpayers.

Earlier this week, figures from the Bank of England and the Council of Mortgage Lenders revealed that lending to both businesses and homebuyers remains at historic lows, prompting Vince Cable, the Business Secretary, to threaten banks with an "enormous kickback" from politicians that might include new financial penalties or tax levies.

However, Lord Turner's speech implies that the FSA accepts that banks are having to lend less freely as they build up their capital reserves. And he warned that a key role for the new Financial Policy Committee, the body that the Government intends to charge with preventing future systemic crises such as the credit crunch, might be "to take away the punch bowl before the party gets out of hand".

"Taking away the punch bowl, however, will not always be popular," he said. "It could mean restricting mortgage credit when individuals are buying houses in a rising market... it means slowing down credit booms which, as long as they last, make governments popular and swell their tax revenues."

Nick Anstee, the Lord Mayor of the City of London, also warned against vilifying the banks, saying in his speech that practices had improved. "The City has listened to the criticisms," Mr Anstee added. "We have examined how we operate and we have changed the way we go about our business."

He also warned again of the dangers of overreacting to the financial crisis. "If we get regulation wrong, we will lose business, banks and jobs to financial centres overseas – particularly those in the emerging markets," Mr Anstee said. "And they will seize them with gratitude – and perhaps be a little baffled that the UK has acted against its own interests."