endogenously generated by a financial cycle spinning ‘ out - of - control ’ dwarfs the ‘ mopping up ’ ability of fiscal and monetary policy due to fiscal capacity limits and the zero lower bound on nominal interest rates. in matters of financial instability, prevention is always better than cure ”. the fpc recommendation on the loan - to - income ( lti ) flow limit is that the pra and the fca should ensure that mortgage lenders do not extend more than 15 % of their total number of new residential mortgages at lti ratios at or greater than 4. 5. the fpc recommendation regarding mortgage affordability is that when assessing affordability, mortgage lenders should apply an interest rate stress test that assesses whether borrowers could still afford their mortgages if, at any point over the first five years of the loan, bank rate were to be 3 percentage points higher than the prevailing rate at origination. for further detail, see for instance bank of england ( 2014 ) for a documentation of the bank of england ’ s 2014 housing market measures. see bank of england ( 2016 ). an additional mechanism that creates amplification is that if and when these risks do materialise, market participants begin to doubt the solvency of even banks that are resilient. this is a form of what economists call ‘ knightian ’ uncertainty ( knight, 1921 ) ; caballero and krishnamurthy ( 2008 ) present a model based on this concept. in his classic paper on policymaking under uncertainty, brainard ( 1967 ) argues that it will generally be optimal to use all instruments available when pursuing particular targets. this result holds provided the tools have less - than - perfectly correlated impacts on the target. in these circumstances, while any given tool may prove ineffective, it is less likely that their combined use will be. there is, therefore, an insurance benefit to using multiple tools in moderation. under the bank of england act 1998, as amended by the financial services act 2012, the bank of england has a statutory objective to protect and enhance the stability of the financial system of the united kingdom. subject to achieving this primary objective, the fpc must also support ‘ the economic policy of her majesty ’ s government, including its objectives for growth and employment ’ ( section 9c ( 1 ) of the bank of england act 1998 ). the first signs of that can be seen in the work being conducted internationally and domestically to study and address risks around asset management, market liquidity

. when the music stops, the process goes into sudden reverse. as valuations fall, borrowers are left struggling to service loans that are greater than the value of the property. firesales begin. sentiment deteriorates. and market valuations collapse. in short, finance magnifies the cycle. this is detrimental to you, to lenders, and to the rest of the economy. and to your great credit, your industry has been in the vanguard of thinking to deal with this. the proposal of the cross - industry vision for real estate finance, led by nick scarles of grosvenor, was that everyone – lenders, borrowers and regulators – should consider appropriate levels of debt not relative to market prices but relative to cash flows capitalised at long - term, cycle - neutral, rates. put simply, if prices rise because of sentiment rather than cashflow prospects, that should result in greater reliance on equity, rather than debt, finance. so when the inevitable reverse in sentiment happens, it won ’ t be magnified by an overindebted industry. the industry proposal is music to our ears. if you apply it, it will stop debt running away unsustainably in the good times. and it will cushion the bad times. it ’ s countercyclical, mirroring the way capital requirements for banks will now operate. and it ’ s completely in tune with the broader aim of reducing the way finance magnifies cycles. so we want to help you make progress with it. as capitalisation rates come down from their post - crisis highs, the need to do so is increasing. bis central bankers ’ speeches so in a matter of months, the bank of england will start reporting market - wide indicators of valuations and gearing based on cashflows capitalised at cycle - neutral rates. it will help you to measure the risks. and risk that gets measured can get managed, by you and by us. these measures aren ’ t a panacea. they can ’ t guarantee occupancy rates or rents for you. but had they been used to guide your decisions and our policy, they would have made a real difference in the run - up to the crisis. in fact, the last commercial real estate cycle could have been severely curbed and loss rates for some banks dramatically reduced. so your industry really does deserve great credit for taking the lead in developing the answers. now – when you most feel like celebrating – is the time