By Huw Jones and David Milliken
LONDON (Reuters) - Bank of England policymakers differed last month over how best to stop home-buyers from borrowing too much, as they tried to reduce the risks from rapidly rising house prices and high levels of debt.
A record of their June 17 meeting released on Tuesday also revealed for the first time discussions between the BoE and Britain's finance ministry dating back to September 2011 over how to protect against the risk of a euro zone break-up.
The BoE's Financial Policy Committee (FPC) imposed its first limits on how much most people can borrow to buy a home on Thursday. It said it would only allow 15 percent of new mortgages to be at multiples higher than 4.5 times a borrower's income, and that all lending would be subject to extra affordability checks.
Tuesday's record of the meeting at which this was agreed showed that policymakers had also considered setting a lower ratio as the threshold, but relaxing rules to allow more mortgages above that level.
"On balance, the Committee agreed that it would set the policy by restricting the flow of lending at very high LTIs (loan-to-income ratios)," the central bank said.
The committee agreed to monitor future housing developments and adjust the policy as necessary.
Formally launched last year to plug supervisory gaps highlighted by the 2007-2009 financial crisis, the committee has a suite of so-called macroprudential tools.
But their use is largely untested in Britain and elsewhere, a factor which prompted policymakers to err on the side of caution with the cap.
"In choosing where to set the limit, the Committee had taken account of the fact that there was inevitable uncertainty about the effect of such macroprudential tools," the record said.
POLICY DIFFERENCES
BoE deputy governor Jon Cunliffe said in a newspaper interview published on Saturday that policymakers had initially had different views on how best to tackle risks posed by the housing market before reaching a consensus.
British house prices have risen by 10 percent over the past year and by almost twice that in London, but the central bank has stressed it does not target house prices.
The record showed that most policymakers agreed that a housing shortage was the main driver of house price rises, although one policymaker noted that big rises had also taken place in countries without a housing shortage.
BoE data on Monday showed that mortgage approvals were slowing even before the FPC imposed last week's measures, with the number of loans approved in May at an 11-month low.
But economists are unsure whether this is a short-lived reaction to new affordability rules which took effect in April, or part of a longer-lasting slowdown. The FPC said it was more likely to be the former.
The committee discussed for the first time whether to require banks to hold more capital to cool credit supply.
The record said there were risks that could prompt activating a countercyclical capital buffer. But because most indicators on core bank balance sheet strength had improved recently, the committee decided to set the buffer at zero percent for the time being.
The committee also discussed for the first time whether to ask the government to extend its remit beyond the core banking sector, but decided against doing so.
However, it asked regulators to examine what would happen if a big hedge fund got into trouble, and study possible systemic risks from growth in asset management businesses, echoing comments on Sunday from the Bank for International Settlements.
(Editing by Louise Ireland)