Articles | Taxpayers to bail-out banks again

Taxpayers in second bank bail-out

Published: Monday, 19 January 2009, 7:36AM

The Government has unveiled plans to insure banks against their toxic debts and encourage them to start lending again.

In a joint press conference with the Prime Minister, plans to put hundreds of billions of pounds of taxpayers' money on the line were announced.

Gordon Brown said the move was necessary to free up money in the banking system after a "major loss" of lending capacity in all economies.

Mr Brown said: "These are comprehensive measures focused on one purpose - increasing the amount of lending that is available to families and to the businesses who are the backbone of our country and who want to invest and create jobs."

The extra cash injection comes just three months after October's £37 billion bank bail-out and taxpayers will be questioning why the first was seemingly insufficient.

But Mr Brown said previous measures announced by the Government had been designed to stabilise the banks rather than expand lending.

But following Friday's dramatic stock market falls amid fears that the banks were set to reveal further massive writedowns, it remains to be seen how much of the extra cash will be used to mop up toxic debts by the banks.

Going into detail on the plans, Mr Brown announced a new Bank of England fund, worth up to £50 billion, which will be used to buy assets from banks and other financial institutions to encourage the resumption of lending by the non-banking sector.

In affect, the Treasury will insure banks against their losses, taking some of the risk out of lending.

Mr Brown said there would also be an extension of the credit guarantee scheme and a new strategy for Northern Rock in an effort to increase capacity in the mortgage markets.

In addition, Mr Darling will negotiate a new lending responsibilty agreement with each bank to ensure he can keep a record of what the bailout cash is being used for.

Mr Brown added: "The impact of today's announcements on public finances will be temporary, investments will be held for no longer than is necessary to ensure stability.

"We will protect taxpayers' interests, liabilities will be backed by assets and fees will be charged for the schemes that we are introducing.

"But the costs of doing nothing are simply to great. These are extraordinary times, they require unprecedented action."