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New rescue scheme for UK's banks New rescue scheme for UK's banks
(about 1 hour later)
The government could be set to take even larger stakes in some of Britain's biggest banks under a plan being discussed at the Treasury this weekend.The government could be set to take even larger stakes in some of Britain's biggest banks under a plan being discussed at the Treasury this weekend.
The aim is to encourage banks to lend once again, easing the current credit freeze which is hitting many firms.The aim is to encourage banks to lend once again, easing the current credit freeze which is hitting many firms.
In addition, the Treasury is to set up a bank insurance scheme to try to revive confidence, the BBC has learned.In addition, the Treasury is to set up a bank insurance scheme to try to revive confidence, the BBC has learned.
This would allow banks to pay a fee and have their bad loans underwritten by the taxpayer up to a certain level.This would allow banks to pay a fee and have their bad loans underwritten by the taxpayer up to a certain level.
There are likely to be two main strands to the government's new bank rescue plan. There are likely to be two main strands to the government's new bank rescue plan, which comes on top of the £37bn bank bail-out agreed last autumn.
Firstly, the government is set to offer guarantees on new consumer loans.Firstly, the government is set to offer guarantees on new consumer loans.
Secondly, the Treasury is proposing a swap of preference shares it took in RBS and HBOS for ordinary shares, effectively freeing-up cash for the banks concerned.Secondly, the Treasury is proposing a swap of preference shares it took in RBS and HBOS for ordinary shares, effectively freeing-up cash for the banks concerned.
Confidence buildingConfidence building
John McFall MP, the Labour chairman of the Commons treasury committee, said the government had little alternative to a new rescue plan. I think we are now inexorably heading towards taking over the balance sheets of the big beasts Justin Urquhart Stewart, Seven Investment Management Robert Peston's blog
"We have got to go back again with a bigger sum because, quite frankly, the banks in my opinion haven't been honest enough about the toxic assets on their books."
BBC business editor Robert Peston says the moves are designed to avert a further loss of confidence ahead of gloomy results expected from the big banks.BBC business editor Robert Peston says the moves are designed to avert a further loss of confidence ahead of gloomy results expected from the big banks.
"It'll be designed to give banks and their investors a bit more certainty about the losses they'd face as the recession undermines the ability of many borrowers to repay their debts," he said. I think we are now inexorably heading towards taking over the balance sheets of the big beasts Justin Urquhart Stewart, Seven Investment Management class="" href="http://www.bbc.co.uk/blogs/thereporters/robertpeston/">Robert Peston's blog "It'll be designed to give banks and their investors a bit more certainty about the losses they'd face as the recession undermines the ability of many borrowers to repay their debts," he said.
Britain's largest banks suffered sharp share price falls last week, with Barclays falling 25% on Friday. Under the proposals, banks would get a new state-controlled insurance company to provide cover in the event of bank customers defaulting on their loans.
The government is keen to shore-up confidence in the banking system, ahead of widely-expected losses at HBOS and the Royal Bank of Scotland.
Under the proposals, banks would examine both corporate and private customers looking for potential defaulters.
They would then approach the new state-controlled insurance company which, in return for a premium, would provide cover in the event of those customers not paying their bills.
Having insured themselves against potential losses, the banks would have more to lend because they would not have to set aside money in anticipation of bad debts.
Share swapsShare swaps
Another option is the swapping of government-owned preference for ordinary shares in the banks. Another option is the swapping of government-owned preference for ordinary shares in the banks. SHARE DIFFERENCES Ordinary shares - give you voting rights at general meetings, and pay a variable dividend depending on profitsPreference shares - give you no voting rights, but pay a fixed dividend irrespective of profits
Last October the government bought both types of shares in RBS, Lloyds TSB and HBOS as part of its £37bn bail-out. SHARE DIFFERENCES Ordinary shares - give you voting rights at general meetings, and pay a variable dividend depending on profitsPreference shares - give you no voting rights, but pay a fixed dividend irrespective of profits Last October the government bought both types of shares in RBS, Lloyds TSB and HBOS as part of its bail-out.
These government-owned preference shares mean the banks concerned are committed to paying out a dividend on them - at a time when the finance sector is struggling. These government-owned preference shares mean the banks concerned are committed to paying out a dividend on them.
BBC business correspondent Joe Lynam said: "The banks have long complained that the fees, or coupons, attached to the preference shares they sold to the Treasury, were too high at over £1bn every year.BBC business correspondent Joe Lynam said: "The banks have long complained that the fees, or coupons, attached to the preference shares they sold to the Treasury, were too high at over £1bn every year.
"They also said that it tied up too much money which could otherwise be loaned to companies and individuals."
He said amid a deepening downturn the prospect of more taxpayer support to banks may be unpalatable for those facing redundancies in industries which have been starved of credit.
If the swap is agreed, it could increase the government's stake in RBS to 70%, and in the Lloyds Banking Group to over 50%.If the swap is agreed, it could increase the government's stake in RBS to 70%, and in the Lloyds Banking Group to over 50%.
However Lloyds, which begins trading on Monday as Lloyds Banking Group after the merger of HBOS and Lloyds TSB, is said to be resisting such a move. However Lloyds, which begins trading on Monday as Lloyds Banking Group after the merger of HBOS and Lloyds TSB, is said to be unhappy about ceding majority control to the government.
Lloyds bank bosses are said to be unhappy about ceding majority control to the government which they believe would lead to greater influence over its lending operations.
Other moves set to be announced this week from the Treasury are likely to include an extension of the timetable for Northern Rock to repay its borrowings to the Bank of England and the government.
'Protect jobs''Protect jobs'
Earlier, Prime Minister Gordon Brown said talks with international leaders were ongoing to tackle the global financial crisis caused by the failure of banking systems. What happened to the £37bn worth of taxpayers' money that's already gone into the banking system? Vince CableLib Dem Treasury spokesman Earlier, Prime Minister Gordon Brown refused to rule out further bank nationalisation plans, and some analysts think state-ownership will be the end result of such government rescues. What happened to the £37bn worth of taxpayers' money that's already gone into the banking system? Vince CableLib Dem Treasury spokesman
He said that banks should admit how many "toxic assets" they have on their balance sheets. "I think we are now inexorably heading towards taking over the balance sheets of the big beasts," said Justin Urquhart Stewart, of Seven Investment Management.
Mr Brown told the Financial Times the banks had to "come clean" about these bad debts so people could trust them again. Liberal Democrat Treasury spokesman Vince Cable said: "We do need to establish first of all what happened to the £37bn worth of taxpayers' money that's already gone into the banking system."
He said: "One of the necessary elements for the next stage is for people to have a clear understanding that bad assets have been written off. Ministers hope their measures will persuade banks to start lending again. However, Angela Knight of the British Bankers' Association, said many problems were stopping the banks from doing that.
Mr Brown refused to rule out further bank nationalisation plans, and some analysts think state-ownership will be the end result of government rescues. "Additional capital rules, statements by governments, problems around the world - which are not helping us, us being all the major banks in the UK, who are wanting to lend more to pick up that capacity that's gone away out of the UK market."
"I think we are now inexorably heading towards taking over the balance sheets of the big beasts, " said Justin Urquhart Stewart, of Seven Investment Management.
Liberal Democrat Treasury spokesman Vince Cable said functioning British firms could not be allowed to fail simply due to problems in the banking sector.
"There is a real crisis at the moment that very large numbers of very good British companies, completely solvent companies, cannot raise credit from the bank.
"They cannot be allowed to go down in large numbers taking large numbers of jobs with them, simply because the banks aren't functioning properly."
But he said: "We do need to establish first of all what happened to the £37bn worth of taxpayers' money that's already gone into the banking system."