Published January 20, 2009

UK rolls out another rescue for banks

Move will increase cost to taxpayers by at least &pound100b

By NEIL BEHRMANN
IN LONDON

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THE British government announced a radical second rescue plan for banks to encourage them to lend at lower rates and boost the faltering UK economy.

Push for loans: British Prime Minister Gordon Brown (left) and Mr Darling at a news conference in London yesterday. Mr Darling says he is putting in place a range of measures designed to get lending going again

The plan will increase the taxpayer's cost of bailing out Britain's banks by at least &pound100 billion (S$216.8 billion), the Treasury said.

'What I'm doing today is putting in place a range of measures that are all designed to get lending going again,' Chancellor of the Exchequer Alistair Darling said.

The move by the government - the second rescue package in four months - drew a mixed response. Sterling and government bonds tumbled but the share market rose.

In October 2008, the government funded banks to the tune of &pound37 billion. Despite that, banks are still reluctant to lend to businesses and those that have received loans have had to pay interest rates well in excess of the Bank of England rate of 1.5 per cent.

In the meantime, rates for savers have plummeted to around one to 2 per cent depending on the duration of deposits.

Among the latest measures is a government scheme that will enable banks to insure themselves against losses on their riskiest assets. Under this plan, the government will charge a fee to guarantee about 90 per cent of banks' potential losses on assets that could dent their capital base.

'This insurance, where you can put a floor under valuations, is very important,' said Angela Knight, chief executive of the British Bankers' Association.

But critics such as veteran economist Roger Nightingale said that the money dished out to the banks is at the expense of the rest of the economy. It would be far better to slash rates and increase the money supply, he said.

'Bankers have not been good at running banks but have been good at conning naive politicians,' Mr Nightingale said.

HSBC said that despite a slide in its shares, it has not sought new capital from the UK government.

HSBC chief executive Michael Geoghegan has condemned state-sponsored bailouts of banks, saying it risks rewarding management for failure.

Mr Darling and the Treasury, however, insist that worries about toxic mortgage debt and other assets have caused a logjam in interbank lending and a sharp reduction in loans to businesses. The government is allocating &pound50 million to a fund that will enable the Bank of England to buy assets including corporate bonds, commercial paper and syndicated loans.

The government is also raising its stake in Royal Bank of Scotland to 70 per cent from 58 per cent in view of an an expected loss of up to &pound28 billion - the biggest loss in British corporate history.

The Treasury is extending the &pound250 billion Credit Guarantee Scheme it opened in October as part of the first round of the bailout. The programme allows banks to issue bonds backed by the government and will now run until the end of this year instead of April 9 as originally planned.

Northern Rock, the bank that was nationalised last year, will repay a government loan at a slower rate so it can provide more mortgage financing in the UK, a separate statement yesterday said. Northern Rock has been winding down its mortgage lending.

The Treasury and the banks have been in negotiations over the weekend as the October package has not rebuilt confidence in the financial system and persuaded the banks to lend again.

Liberal Democrat treasury spokesman Vince Cable said: 'The government must bite the bullet on the public ownership and control of the banks to ensure that lending is maintained to sound companies who can keep the economy ticking over in these turbulent times.'