Britain rolls out another bank bailout plan to loosen credit

The government hopes new guarantees on toxic assets can spur lending. Its plan includes increasing its stake in troubled Royal Bank of Scotland to nearly 70%. European banking shares plummet.

January 20, 2009|Henry Chu

LONDON — Frustrated by their continued reluctance to lend, the British government unveiled Monday its second plan in three months to stabilize the nation's banks, offering to insure them against big losses on toxic assets in exchange for an agreement to issue loans to creditworthy customers.

European banking stocks plummeted on the plan and on word that Royal Bank of Scotland was on track to record the biggest annual loss in British corporate history -- as much as $42 billion.

The new bailout measures include boosting the government's stake in Royal Bank of Scotland to nearly 70%, up from the 58% acquired by the state under October's $55-billion bank recapitalization plan.

Like the United States, Britain is finding that its initial financial rescue package last fall wasn't enough to stabilize the banking sector or to boost lending.

Since the global credit crisis helped trigger deep recessions in both countries, businesses and prospective homeowners have increasingly found themselves shut out from financing because banks have been skittish about lending.

Under the British plan announced Monday to address the lack of credit, financial institutions that want the new government insurance against major losses on toxic assets must agree to issue loans to creditworthy customers.

RBS said it would agree to make about $9 billion available to British borrowers in exchange for the state protection from certain losses. But the terms of the agreement hadn't yet been made final.

In the U.S., the incoming administration will subject banks to more oversight in their use of funds from the government, Lawrence H. Summers, President-elect Barack Obama's top economic advisor, said Sunday.

The Obama administration also is expected to pursue measures to relieve banks of rotten assets as the credit crunch persists.

One idea is the creation of a government entity to buy up bad loans.

Prime Minister Gordon Brown said the new British actions, which could cost $100 billion or more, were necessary to avert an even greater economic crisis.

"Good businesses must have access to credit. Jobs should not be lost needlessly," he said. "These are extraordinary times. They require unprecedented action."

Just how poorly Britain's economy is faring was reflected in a new forecast by a private think tank that said unemployment could rise from slightly fewer than 2 million now -- already the highest number of jobless workers in more than a decade -- to more than 3 million by the end of 2010. Almost every day brings news that another company is set to lay off thousands more employees.

Under the new insurance being offered against losses on troubled assets, the banks would "take the first hit," Alistair Darling, the government's chancellor of the exchequer, told British radio.

"We would stand behind them in the case of extreme loss," Darling said. "If we don't do that, then we're simply not going to get the lending going into the economy."

The opposition Conservative Party voiced support for the insurance scheme.

"We've run out of options as a country," George Osborne, an opposition spokesman, told the BBC.

"We can't allow our banking system to collapse."

After RBS disclosed its expected record loss, its shares plunged 67% in London trading, their fifth straight decline.

Among other British banking titans, Lloyds Banking Group tumbled 34% and Barclays dropped 10%.

The sector pulled down the overall British market, with the FTSE 100 stock index falling 0.9%. An index of big European stocks sank 1.3%.

In the U.S., where markets were closed Monday for Martin Luther King Day, bank stocks have been tumbling for two weeks on investor fears that nationalization is a real risk as the government commits more funds to keep banks afloat, further diluting the stakes of existing shareholders and potentially restricting the ability of the affected institutions to turn a profit.


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