Darling plans cash injection for banks

Published on Saturday 3 January 2009 19:20

A SECOND multi-billion-pound bailout of the UK's banking system is being considered by ministers, Treasury sources said yesterday.

Amid growing evidence that the 37bn part-nationalisation of the banks last November has failed to get credit moving, Chancellor Alistair Darling is understood to be considering another huge cash injection.

Another option is the creation of a national "Bad Bank" to manage so-called toxic debt. The theory is that, freed from bad debts, high street banks would feel more able to lend.

Treasury sources said no decision had been made on a second bailout. However, one said: "There is a feeling that the situation in at least one of the banks is such that we might have to do something to ensure its liquidity and lending."

But Labour MPs said that if any extra taxpayers' money is to be put into banks, ministers should take full powers to direct banks to lend – effectively meaning that the banks could be fully nationalised.

The lack of credit being offered by banks is being seen as the main factor behind the economic turmoil now hitting homes and businesses across the country. A Bank of England report last week found that banks curbed lending in the final quarter of the year, and plan even tighter restrictions in the coming months.

The spillage into the wider economy has led to dire predictions about the UK's prospects for 2009, with some economists predicting the most severe contraction since the Second World War.

The Treasury's behind-the-scenes plans will renew fears over the health of the banks that opted for part-nationalisation last year – HBOS, RBS and Lloyds TSB.

John McFall, chairman of the Treasury Select Committee, said last night: "The money that is being put in is inconsequential if there is no power or direction from the Government. Given the anecdotal evidence from businesses who have found themselves in severe difficulty in terms of lending, the Government should take the powers to direct lending if more money is made available."

Meanwhile, the Monetary Policy Committee of the Bank of England meets this week amid widespread expectation that it will agree to a further cut in interest rates from the 2% base rate. Analysts are predicting that rates will fall to 0.5% by the middle of the year.