The Labour party are considering making mortgage lending more difficult for British banks to encourage them into lending more to smaller companies.
The proposals have been set out in a report called ‘Financing Investment’ that was commissioned by the Labour leadership and written by GFC Economics, an independent economic research firm.
The paper suggests that British banks are ‘diverting resources’ away from vital industries and instead focusing on unproductive lending, such as consumer credit borrowing.
It argues that the Prudential Regulation Authority (PRA), should use existing powers to make banks hold relatively more capital against their mortgage lending, saying that this would be an ‘incentive to boost SME lending growth’. This is despite the regulator only recently instructing banks to increase capital held against lending.
Despite the obvious political risk of limiting the supply of mortgages, Labour shadow chancellor John McDonnell said that he did not think the proposed changes ‘would cause problems for first-time buyers’, and added that the proposals were not set in stone and Labour would carry out a consultation on the issue.
However, banks argue that SME lending is riskier than mortgage lending, and that it would be even riskier if it were artificially stimulated on the supply side, rather than being led by demand.
Former member of the Bank of England Monetary Policy Committee, Charles Goodhart, said: ‘The capital regulations are meant to be aimed at financial stability, if you start trying to use them for two different objectives you?re likely to find that you could get into difficulties.?
The plan further called for the Bank of England to be moved from its traditional home in Threadneedle Street, Central London, up to Birmingham. Though Mr McDonnell insisted that this had not been finalised, saying that they were ‘trying to stimulate a debate’ and that ‘there is a view that decision-making located in Whitehall, Westminster and the City?.?.?.?results often in a distortion of the economic policy direction.’
Labour has also vowed to set up a new National Investment Bank and a Strategic Investment Board in Birmingham.