This Consultation Paper proposes changes to the PRA rule book to implement the Financial Policy Committee’s recommendation on loan to income ratios in mortgage lending. The Bank of England and the Prudential Regulation Authority (PRA) reserve the right to publish any information which it may receive as part of this consultation. Information provided in response to this consultation, including personal information, may be subject to publication or release to other parties or to disclosure, in accordance with access to information regimes under the Freedom of Information Act 2000 or the Data Protection Act 1998or otherwise as required by law or in discharge of our statutory functions.

The FPC is charged with taking action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system. The FPC is required to publish a Financial Stability Report(FSR)twice a year which must identify key threats to the stability of the UK financial system. As outlined in the June 2014 FSR1, the recovery in the UK housing market has been associated with a marked rise in the share of mortgages extended at high loan to income multiples. Increased household indebtedness may be associated with a higher probability of household distress, which can cause sharp falls in consumer spending. Falls in consumption can in turn weigh on wider economic activity, increasing macroeconomic volatility in the face of shocks to income and interest rates. Furthermore, rapid growth in aggregate credit –which could be associated with a sharp increase in highly indebted households –is strongly associated with subsequent economic instability and the risk of financial crisis. Acting against excessive indebtedness will make the financial system more stable and will reduce the direct and indirect impacts on the firms that the PRA regulates. A more stable economy and financial system will thus help advance the PRA’s objective of promoting the safety and soundness of firms.