LONDON (Reuters) - Blue chip banks could provide a bigger stimulus to Europe's flagging economy if they pared back low-return mortgage lending to pump more firepower into small business and consumer credit, the chairman of HSBC (HSBA.L) told Reuters.
Douglas Flint, boss of Europe's largest bank, said policymakers and banks needed to reconsider the "natural long-term holders" of Europe's multi-trillion euro mortgage market and debate the case for encouraging other money managers to play a bigger role.
Flint said most major areas of finance fitted naturally with certain providers. Infrastructure should be with pension funds and insurance companies, big corporate finance with the capital markets and consumer finance and small business lending with banks.
"You are left with the 'gorilla in the room', mortgages," Flint told the Reuters Global Regulation Summit.
"Low loan-to-value, traditional, straightforward mortgages could be done in a multiple of places ... The question quite legitimately could be: why do we use a very expensive banking system to lend mortgages at a 50 percent LTV?."
Britain's 1.3 trillion pound ($2.05 billion) mortgage market is dominated by the big banks, with Lloyds (LLOY.L) holding almost a quarter of the market. HSBC is the sixth biggest lender with 6-7 percent of the market, up from about 4 percent at the end of 2008.
In the United States, mortgages have moved out of the banking system and are financed mainly through government sponsored entities.
Since the 2007/2009 financial crisis, banks have had to think hard about how to use their money because of the extra capital they must hold to back lending and other activities.
Britain has also introduced a leverage ratio, which does not judge capital needs on the riskiness of assets, so it can deter lending on low-risk products.
"We are in a world of leverage ratios as well as capital ratios, you are putting up 3 maybe 4 percent (capital) in due course against every asset, at which point mortgages would logically price away from the banks," Flint said.
"If someone is putting up 50 percent of their own money, do you need as much as 4 percent on top of that for risk?"
The new capital rules have made banks safer, but smaller companies are struggling to borrow money from risk-averse lenders and shareholders still expect lofty returns, Flint said.
Banks have to take tough decisions on how to allocate whatever balance sheet freedom they have left to assets that provide the best chance of meeting investor expectations.
HSBC has quit 77 businesses in the last four years, and is considering selling more in Brazil, Turkey and elsewhere.
If banks could share the burden of financing European home ownership with private sector lenders or governments, they could channel greater chunks of capital into more challenging lending and 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 the banking system, and leave banks to focus on what the rest of the financial system can't do."
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Editing by Jane Merriman