UK chancellor Alistair Darling will today stake hundreds of billions of pounds of taxpayers’ money on a second bank bail-out in a bid to free up “blocked” credit markets and head off a worsening recession.
It is understood that he will set out plans for the UK government to underwrite the so-called “toxic assets” held by the banks in an effort to restore shaken confidence in the sector while releasing more funds for lending.
He will attempt to get home loans going again with a Government guarantee scheme for mortgage-backed securities which were a major source of funding for the mortgage market before they dried up with the credit crunch.
The wind down of the nationalised Northern Rock’s mortgage book will also be halted in a further measure to increase the availability of home loans.
There were reports that the Government could ease the terms of its original bail-out in which it took preference shares in some of the banks.
These carried an onerous 12% rate of interest, encouraging the banks to pay them back as quickly as possible at the expense of lending.
Some could now be exchanged for ordinary shares, which in the case of Royal Bank of Scotland (RBS) could see the Government increase its stake from 58% to 70%, moving a major step forward towards full nationalisation.
Mr Darling said that in return for extra taxpayer funding the Government would require the banks to enter into “binding agreements” to ensure that it ended up with the families and businesses it was designed to help.
“The global credit crunch means there is less money around to lend, we need to deal with that problem,” he told Sky News.
“It has also meant that as the downturn has affected America, Asia, Europe ourselves, that we (need to) tackle the blockages in the system and make sure that the banks can pass on lending to people and businesses who need it.”
Officials worked throughout the weekend to finalise what is a second bail-out for the banks in the space of just three months.
The Treasury had been looking at the proposals for some weeks after it became clear that the initial £37bn (€41.2bn) bail-out in October had failed to provide a sufficient platform for normal lending to resume.
However they were given added urgency by Friday’s dramatic stock market falls amid fears that the banks were set to reveal further massive write-downs in the forthcoming results season.
It is understood Mr Darling will announce plans to establish an insurance scheme for the “toxic assets” which the banks were left with after the collapse of the sub-prime mortgage market in the US, without at this stage revealing the details.
The intention is to calm some of the “irrational fears” around the banks - which saw 25% wiped off the value of Barclays shares on Friday – while also releasing more funds for lending by reducing the amount the banks have to hold to cover their bad loans.
The first step will be for the banks to identify their risky assets – something they have so far been reluctant to do to the intense frustration of Prime Minister Gordon Brown – which they would want to be covered by the scheme.
The banks would pay a fee to have their bad loans – which some estimates put at more than £200 billion – underwritten by the taxpayer up to a certain level.
Mr Brown, in Egypt for an international summit on the Gaza crisis, said yesterday that the measures were intended to restore lending to businesses and households amid fears that the shortage of credit is driving Britain deeper into recession.
“We know that the essential problem, that has been held back by what has been happening internationally over the last few months, is the resumption of lending and the expansion of lending,” he said.
“What we want to do is see businesses get the money that they need to be able to create jobs and secure investment for the future. What I want to see is people who are mortgage holders having access to mortgages at prices they can afford.