Page last updated at 11:31 GMT, Sunday, 20 April 2008 12:31 UK

Bank's 50bn rescue plan 'needed'

Bank of England
The plan is the biggest ever initiative to inject liquidity into the banking sector

A plan to loan billions of pounds to British banks is needed to stop the UK's financial crisis worsening, the chancellor has said.

Alistair Darling added that without the Bank of England's intervention there was "every chance" the situation would get worse.

Mr Darling confirmed a scheme to lend banks money to help them operate during the credit squeeze.

But he insisted that the loans would have to be paid back.

The BBC understands that the Bank will announce the plans to swap about 50bn worth of government bonds for British banks' mortgages.

Business editor Robert Peston said it would be the biggest ever special initiative by the British monetary authorities to supply liquidity to the British banking system.

'Essential step'

The move would help ease the funding problems which many banks face, opening up the mortgage market to benefit householders and would-be buyers, Mr Darling said.

The sooner there is more openness and transparency the more chance there is of getting ourselves back to the stability and normality that we need
Chancellor Alistair Darling

"What it will do is effectively lend banks money to unfreeze the situation we have got at the moment.

"We believe this will be an essential step in trying to get the financial markets stabilised and that in turn will help the mortgage markets too.

"If this does not happen then there's every chance the situation will get worse."

And likening the situation to a dose of food poisoning, he said that some aspects of the credit crisis "just need to work their way through the system".

Mr Darling denied that the scheme was a bail-out for the banks.

"The Bank of England will be lending the money, so it's got to be repaid, and we will take securities in return for it," he said.

But Liberal Democrat Treasury spokesman Vince Cable expressed concern that the government was offering the banks too good a deal.

"We cannot have a situation where the banks are able to privatise their profits and nationalise their losses," he said.

"Since the mortgages from the banks are of inferior quality and higher risk than the government bonds which they are replacing, the implication must be that taxpayers are shouldering the risks and losses of the banks.

"We need urgent reassurances from the Government that the exchange is taking place on a discounted basis so that the banks and not taxpayers carry any losses."

'Reveal exposure'

Banks are increasingly unwilling to lend to one another because of uncertainty over the exposure which they have to the US sub-prime mortgage market.

The banks have been asking for longer term finance from the Bank of England to fill their funding gap following the collapse of the market for mortgage-backed securities last August.

The disappearance of this market deprived banks of tens of billions of pounds of finance for mortgage lending and is one of the main reasons why the cost of mortgages for many homeowners has been rising, even though the Bank of England has been cutting its base lending rate.

Mr Darling said it was important that the banks began to reveal the extent of their losses as a result of exposure to the sub-prime market - as well as how they were going to rebuild capital.

Britain's second largest bank, Royal Bank of Scotland, is to ask shareholders for about 10bn of extra cash to improve its financial position.

Other institutions were likely to follow suit, the chancellor said.

"The sooner there is more openness and transparency and banks understand the extent of what happened to them since last summer, the more chance there is of getting ourselves back to the stability and normality that we need," he said.

The chancellor will announce full details of the plan tomorrow.

The BBC understands that the government bonds would have a maturity of up to a year, but would be rolled over for up to three years.

These would meet banks' demands for longer term loans, while escaping being accounted for in the national debt.

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