Britain launches 2nd banking rescue plan

January 19, 2009 6:17:28 AM PST
Britain announced a second rescue plan for the country's ailing banks on Monday, hoping to thaw frozen lending by offering to insure banks against large-scale losses on bad assets they already hold.

Prime Minister Gordon Brown said the government would offer to insure banks against default on toxic loans in exchange for legally binding commitments to make credit more freely available to British businesses and home buyers who are struggling in an economic downturn.

Brown and Treasury Chief Alistair Darling acknowledged that October's pledge of 37 billion pounds (about $55 billion) to bail out Britain's banks hadn't done enough to encourage them to resume normal lending volume.

Brown said stimulating lending is vital to spark Britain's economy and to attempt to limit job losses as Britain tackles a recession prompted by the global downturn.

"Good businesses must have access to credit, jobs should not be lost needlessly," Brown told reporters at his Downing Street office. "It is because of this that we are taking the action to expand lending."

Britain's Treasury said the government will offer to insure banks against losses on about 90 percent of specific toxic loans. The plan would require banks to identify their riskiest assets which, for a fee, could be insured with government backing.

It's hoped the offer will reduce anxiety in the banking sector about the value of past investments, boosting their confidence to offer new loans.

Neither Brown nor Darling could say how much the plan will cost taxpayers, as details won't be agreed until banks start participating.

However, the program is expected to expose taxpayers to billions of pounds of potential losses.

Brown said the "investments will be held for no longer than is necessary to ensure stability," but could not specify how long the government expects to operate the program.

"Governments across the world are having to do all sorts of things that they might not wanted to have done a few years ago," Darling told reporters.

Brown denied that the program amounted simply to more help from taxpayers to fix mistakes caused by irresponsible lending by bankers.

"This is not help for the banks but help for businesses and families," Brown said, insisting that the measures would help companies looking for credit, or individuals hoping to find a mortgage to buy a home.

However, critics called the latest rescue plan a gamble, coming only three months after October's bailout.

"The U.K. government is again rolling the dice in an attempt to revive credit and breathe life back into the wider economy," said Keith Bowman, an equity analyst at Hargreaves Lansdown Stockbrokers.

Brown's plan also includes efforts to boost mortgage lending and will see 50 billion pounds (about $74 billion) set-aside to create a special fund for the Bank of England to buy high quality loans and other assets directly from banks.

The government announcement coincided Monday with a report by the Royal Bank of Scotland saying its losses for the full year could be as much as 28 billion pounds ($41.3 billion), which would be the biggest loss ever by a British corporation.

Brown confirmed that the government has increased its stake in RBS to almost 70 percent, but declined to say whether he believed the bank will eventually be fully nationalized.

RBS shares fell 25 percent in morning trading on the London Stock Exchange, but Barclays was up 19 percent, regaining ground lost in a late sell-off on Friday. Lloyds Group was up 1.6 percent and HSBC was little changed.

Associated Press Writer Nancy Zuckerbrod contributed to this report

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