UK: banks to get more cash if they pass it on

UK says it will only give more money to banks if they agree to pass it on to borrowers

• By Raphael G. Satter, Associated Press Writer
• On 7:01 pm EST, Sunday January 18, 2009

LONDON (AP) -- Britain is bailing out its banks. Again.

Only three months after the government put 37 billion pounds into shoring up its shattered financial system, Britain is putting billions more into an insurance plan intended to get banks lending again.

At the root of the problem lies what treasury chief Alistair Darling said Sunday were "blockages in the system" that have prevented the money pumped into the financial sector from seeping into the wider economy. Interest rates on mortgages remain high and the number of loans remains low. With banks poised to return dismal earnings reports, Britain is again putting up taxpayer money to guarantee their wobbly balance sheets.

But this time, Darling says, that money will have to be passed on. The chancellor told Sky News television that banks would have to "enter into binding agreements to make sure that, if we put additional money into the system, it goes to the people and businesses it is designed to support."

Just how much money Darling is prepared to put on the table isn't clear.

A government official said the British treasury was preparing an insurance plan for some of the weakest items on the banks' balance sheets. In return for a fee, the government would agree to guarantee risky loans and bad debt with taxpayers' money, the official said. If the loans went sour, the banks would be reimbursed from the public purse.

Although some media reports have put the size of the expected liability at up to 200 billion pounds ($300 billion) the official said he could not give a figure, saying many aspects of the plan were still being negotiated.

The official spoke on condition of anonymity because the information had not yet been released to the markets. He said a formal announcement was due before the markets opened Monday, and Darling and Prime Minister Gordon Brown were expected to address the issue at a news conference later in the day.

Underwriting huge chunks of private debt would see even wider swaths of Britain's partly nationalized banking sector fall under government control, but the government is desperate to get money flowing through the economy again. The squeeze on credit is hurting efforts to contain the damage being done to Britain's battered housing market and its recession-hit economy.

"What we want to do is to see businesses get the money that they need to be able to create jobs and to secure the investments for the future," Brown told Sky News Sunday. "What I want to see is that people who are mortgage-holders have access to mortgages at a price they can afford."

The government official refused to comment on reports that the government was seeking to take a bigger stake in partially nationalized banks such as the Royal Bank of Scotland PLC and LLoyds Banking Group PLC, of which the government owns 57 percent and 43 percent, respectively.

The Sunday Telegraph and Sunday Times both said the government's new bailout plan would see it take bigger stakes in Lloyds and RBS -- increasing its share in RBS to 70 percent and taking majority control of Lloyds, which accounts for half of Britain's savings market and more than a quarter of its mortgages. Calls placed with both banks were not returned Sunday.

Government stewardship of such a huge part of the nation's financial sector would mark a significant change of fortune for Britain's once-proud banks. One legislator said the process might eventually go even further.

"Maybe at the end of the day we should consider the nationalization of the whole banking system," John McFall, a lawmaker from Britain's ruling Labour Party, told BBC television on Sunday.

"A few months ago I said were only a hop, skip and a jump away from nationalization," McFall said. "I think now we're only a jump away."

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