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By Sinead Cruise and Steve Slater
LONDON, May 15 (Reuters) - Blue chip banks could provide abigger stimulus to Europe's flagging economy if they pared backlow-return mortgage lending to pump more firepower into smallbusiness and consumer credit, the chairman of HSBC toldReuters.
Douglas Flint, boss of Europe's largest bank, saidpolicymakers and banks needed to reconsider the "naturallong-term holders" of Europe's multi-trillion euro mortgagemarket and debate the case for encouraging other money managersto play a bigger role.
Flint said most major areas of finance fitted naturally withcertain providers. Infrastructure should be with pension fundsand insurance companies, big corporate finance with the capitalmarkets and consumer finance and small business lending withbanks.
"You are left with the 'gorilla in the room', mortgages,"Flint told the Reuters Global Regulation Summit.
"Low loan-to-value, traditional, straightforward mortgagescould be done in a multiple of places ... The question quitelegitimately could be: why do we use a very expensive bankingsystem to lend mortgages at a 50 percent LTV?."
Britain's 1.3 trillion pound mortgage market is dominated bythe big banks, with Lloyds holding almost a quarter ofthe market. HSBC is the sixth biggest lender with 6-7 percent ofthe market, up from about 4 percent at the end of 2008.
In the United States, mortgages have moved out of thebanking system and are financed mainly through governmentsponsored entities.
Since the 2007/2009 financial crisis, banks have had tothink hard about how to use their money because of the extracapital they must hold to back lending and other activities.
Britain has also introduced a leverage ratio, which does notjudge capital needs on the riskiness of assets, so it can deterlending on low-risk products.
"We are in a world of leverage ratios as well as capitalratios, you are putting up 3 maybe 4 percent (capital) in duecourse against every asset, at which point mortgages wouldlogically price away from the banks," Flint said.
"If someone is putting up 50 percent of their own money, doyou need as much as 4 percent on top of that for risk?"
The new capital rules have made banks safer, but smallercompanies are struggling to borrow money from risk-averselenders and shareholders still expect lofty returns, Flint said.
Banks have to take tough decisions on how to allocatewhatever balance sheet freedom they have left to assets thatprovide the best chance of meeting investor expectations.
HSBC has quit 77 businesses in the last four years, and isconsidering selling more in Brazil, Turkey and elsewhere.
If banks could share the burden of financing European homeownership with private sector lenders or governments, they couldchannel greater chunks of capital into more challenging lendingand potentially spur faster economic growth, Flint said.
"To me the societal role of banks is to do credit allocation... You could see a case for taking out mortgages from thebanking system, and leave banks to focus on what the rest of thefinancial system can't do."
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