Propping up the
tattered banking system

Taking on hundreds of billions of pounds of extra bank liabilities

They are the most far-reaching proposals yet to prop up the tattered banking system. Yet it is far from certain that the government taking on hundreds of billions of pounds of extra bank liabilities will kick-start lending to firms and families. So what did the government announce and will it work?

Asset Protection Scheme Banks are being allowed to buy insurance from the government to protect themselves against losses against their portfolios of toxic assets. It is estimated that up to £260bn may have to be underwritten. The scheme is modelled on America’s last November rescue of Citigroup. Analysts argue that it would be better to set up a so-called ‘bad bank’, which removes all the debts from firms’ books.
Under Britain’s scheme, lenders will still nurse heavy losses because the bad debts will remain on their balance sheets. Taxpayers will pay the bulk of the bill as and when borrowers default.

Asset Purchase Plan The Bank of England will be empowered to lend directly to companies. It will buy up to £50bn of debts and will hopefully bring down the cost of borrowing for cash-starved companies. It finally brings UK policy into step with the US Federal Reserve, which has been lending directly to companies for months.
It also paves the way towards what economists call ‘quantitative easing’ by the Bank of England. This would involve the Bank printing money and lending it to firms.

Mortgage Guarantee Scheme The government will guarantee sales of bundled up mortgages and other loans in the hope of kick-starting the lending markets. This acts on a set of proposals published by former Halifax Bank of Scotland chief, Sir James Crosby, under which he said the state should underwrite up to £100bn of so-called ‘mortgage-backed securities’. The government will also extend a guarantee of £250bn of bank debt.

Nationalised banks to lend more Northern Rock will stop ‘actively encouraging’ its customers to quit the bank when their current mortgage deals expire. In addition, the government will swap up to £5bn of ‘preference shares’ in RBS for ordinary shares that pay a less punitive rate. In return, RBS has pledged to bolster lending to firms and individuals. The twin moves are an attempt to plug the widening gap in Britain’s consumer loans market.