US to expand economic rescue plan

The US government plans to expand protections greatly for the US banking system out of deep concern for the economy, an industry official said after banking executives and top federal officials met to revamp the largest bail-out plan in the nation’s history. President George is to announce the expansion later today.

The US government plans to expand protections greatly for the US banking system out of deep concern for the economy, an industry official said after banking executives and top federal officials met to revamp the largest bail-out plan in the nation’s history.

President George Bush is to announce the expansion later today.

Stocks soared around the world yesterday in response to dramatic government economic rescue efforts in the United States and elsewhere and the possibility of the even bolder American action.

The administration will use perhaps as much as $250bn (€183bn) of the $700bn (€512bn) bail-out package recently passed by Congress to buy stock in US banks and provide the banks with desperately needed money, the official said.

In addition, the Federal Deposit Insurance Corp will temporarily provide insurance for loans between banks, charging the banks a premium for doing so. That should unlock a vital credit flow that has come under severe stress, putting the health of the US economy in peril.

The official, who spoke with knowledge of the Treasury Department meeting with the bankers yesterday, commented only on condition of anonymity because details of the plan had yet to be released.

This FDIC programme would take the form of providing insurance for new senior preferred debt that one bank would lend to another bank.

This debt would be insured by the FDIC for three years, helping to unlock bank-to-bank lending, which has fallen dramatically because of fears about repayment in the face of billions of dollars of bank losses because of bad loans, primarily in mortgages.

The official said the FDIC also was considering the temporary removal of the current $250,000 (€183,000) limit on FDIC insurance on bank deposits. However, it was unclear whether all deposits above this amount would be covered or only certain types.

In response to the crisis, Congress as part of the bailout bill temporarily boosted the deposit insurance cap from $100,000 (€73,000) to $250,000 (€183,000).

The administration’s proposals were explained during a meeting at the Treasury Department that had been called by treasury secretary Henry Paulson and included the top executives of the largest banks in the country. Federal Reserve chairman Ben Bernanke also participated in the discussions.

EU regulators yesterday cleared British and Irish plans to guarantee their troubled banking sectors and promised to fast-track approval of other governments’ rescue packages if they met EU rules.

The European Commission said it now stands as the only neutral judge of individual EU governments’ plans to pump billions into the banking sector, and announced a set of rules for the bail-outs to meet. States that follow the guidelines published yesterday will win quick EU approval within as little as 24 hours, it promised.

Britain’s £50bn (€64bn) plan to partly nationalise major banks and guarantee a further £250bn (€320bn) pounds of bank loans falls within EU rules, the EU’s executive said.

EU regulators said the “innovative and well-designed support scheme” for British banks was justified because it remedies a serious disturbance in the British economy without damaging competition. They praised it for being temporary and for preventing banks from profiting from it.

Ireland also finally won EU backing for its banking guarantee, the first by a European country and one that raised hackles because it covered all bank deposits and interbank loans only for six Irish-based lenders.

Britain and others at first complained this would attract money away from their nations’ banks, which at the time had no guarantee, to Irish rivals.

Six EU nations – Germany, Britain, France, the Netherlands, Spain, Portugal and Austria – have since followed suit, with guarantees and other emergency measures to save the banking system in their most unified response yet to the global financial crisis.

Under EU pressure, Ireland agreed to cover major foreign-based banks operating in the country, to agree to create a pricing programme levying a fee on banks to pay for the guarantee, and to set safeguards to stop banks from making money from a plan that now limits their business and balance-sheet growth.

EU Competition Commissioner Neelie Kroes yesterday warned that her office was now the “only neutral referee” checking that billions backing up banks will not damage competition across the economy.

“There will be problems if those measures are discriminatory or could cause negative spillovers in other member states by, for example, diverting financial flows,” she said.

Under European Union state aid rules, governments can only fund private businesses in a strict set of circumstances to make sure they don’t give one company an unfair advantage. If these rules are not met, the EU can demand money be paid back under threat of legal action.

The European Commission yesterday published guidelines for banking bail-outs that require them to avoid discriminating against banks based elsewhere in Europe and allowing beneficiaries to attract extra business. State subsidies must be temporary and partly funded by the private sector, it said.

France and others have long chafed against the strict EU subsidy rules that prevent them funding industry. Together with Germany, Italy and Britain, France called last week for more flexibility on how the EU decides on the bank rescue packages.

But Ms Kroes said the EU’s state aid rules were necessary to prevent Europe’s economy descending into chaos, calling on governments “to rise above the impulse for unilateral” action.

EU antitrust regulators say they are already flexible because they quickly cleared emergency government rescues of mortgage lenders Bradford & Bingley and Hypo Real Estate in recent weeks, as well as Denmark’s banking guarantee.