This leads me to the big elephant in the room (and something
that central banks and macro-prudential authorities understandably do not want to talk about directly): politics. Raising capital requirement to counter a credit boom can be easily justified in terms of financial resilience. In the case of tightening borrower-based
measures, the impact is more directly observable. Households with less resources for a down payment, mostly families with lower income (and often younger households) can no longer take out a mortgage. This in turn can lead to political pressure,
as documented nicely by my former PhD student Etienne Lepers in one of his thesis chapters. When the Central Bank of Ireland wanted to tighten loan-value ratios in the years before the pandemic, there was strong resistance from media, ministry of finance and
politicians. Is a more independent macro-prudential authority (e.g., central bank) less likely to give in to such political pressure and raise borrower-based measures during a credit boom? The maybe surprising finding is that no. This points to
limitations in the political independence of central banks and a much more complicated relationship between central banks and governments, confirmed by the Bank of England’s reaction this week (including through statements) to the new government’s
fiscal policy chaos.