Radical measures to rescue British banks

Published on Friday 16 January 2009 09:00

A WEEKEND of talks are to take place to thrash out the next stage of the rescue of the British banking sector.

Among the radical measures expected be included in the Treasury's plans is the creation of a "bad bank" that will buy up tens of billions of pounds of the "toxic" assets of the country's ailing lenders.

Prime Minister Gordon Brown has indicated that "action" is needed on toxic debts, which have been blamed for deterring banks from resuming normal lending to UK customers.

It has already bought up massive stakes in Royal Bank of Scotland and Lloyds Banking Group, which formally starts trading on Monday following the takeover of HBOS.

The weekend of talks will feature government ministers and bank executives, who are thought to be resistant to the "bad bank" proposals.

A "bad bank" scheme would see taxpayers having to take on billions of pounds of risky assets to free up the banks to lend.

The next stage of proposals could also see the Government snap up further stakes in banks.

Speaking after a meeting with German Chancellor Angela Merkel, Mr Brown indicated for the first time that the Government is planning to act on toxic debt.

He said: "We must secure the widest possible transparency and the necessary renewal of trust in the banking system.

"That is an essential element of rebuilding the global financial system.

"It will also require us to take action on impaired assets in the banking system. It will mean that we have to have new standards of surveillance and supervision for global financial institutions."

The talks come as the US Government steps up its rescue plan today as it confirms it is to bail out investment banking giant Bank of America, which employs 8000 staff in the UK, with a further 13.7 billion of funds.

There are concerns that the sector is set to announce more hefty writedowns on bad debts that could wipe out the UK Government's 37bn capital cash injection.

Royal Bank of Scotland, which is almost 60 per cent owned by the Government, had this week already seen its shares decline by 25 per cent this week before the market opened today.

But in early trading today RBS shares increased by 4.2 per cent to 41.6p. However, a volatile day was expected following the return of short-selling, the practice banned following dramatic declines in bank stocks last year.