Page last updated at 16:09 GMT, Sunday, 4 January 2009

Government mulls help for banks

Alistair Darling
The Chancellor says lending is not at the levels he wants to see

The government has said it is mulling further plans to encourage UK banks to raise lending to firms and households.

Chancellor Alistair Darling said that pumping more state cash into banks was not the "first port of call".

But he added that discussions would be held about what further steps could help thaw the loans freeze.

BBC business editor Robert Peston said the Treasury was eyeing an insurance scheme where banks would pay a fee to reduce potential losses on bad loans.

He added the scheme may encourage the banks to lend more freely because they would have a better idea of what losses they could face, while the state was sharing the risk.

The corollary of all this would be a significant increase in the risks and potential losses carried by taxpayers
Robert Peston
BBC Business Editor

"My strong sense is that the Treasury is moving towards a plan that looks awfully like the Tories' proposal for taxpayers' to guarantee a proportion of lending to business," our business editor said.

'Strong'

The ability of businesses and homebuyers to obtain credit is seen as key to economic recovery.

And in October, three major British banks - RBS, HBOS and Lloyds TSB - were bailed out with 37bn package aimed at helping banks shore up their balance books and make affordable funding available.

But banks eager to escape further problems have drawn in their lending.

They now face a difficult balancing act between supplying the credit that is the oxygen for small businesses, and protecting themselves from the bad debts that got them into trouble in the first place.

Mr Darling admitted to the BBC that "although lending is taking place, it is not taking place at a level I would like to see".

"Recapitalisation is not your first port of call but over the next few weeks we will continue to discuss with banks what further steps we can take that would help lending, particularly to small- and medium-sized businesses."


We have to ensure there is enough money in the system so that businesses and people looking for mortgages can get the money

Alistair Darling

"We have got to make sure these banks are strong enough in the first place - in other words, to help that recapitalisation process.

"But we also have to ensure there is enough money in the system so that businesses and people looking for mortgages can get the money."

Further injection?

Prime Minister Gordon Brown defended the decision to pump cash into the banks - despite it not leading to lending returning to more normal levels.

Without the intervention he said "you would have had a banking collapse, you would have lost major institutions", he told the BBC.

The government's goal was now to get the banks doing what they said they would do after the recapitalization - that is, maintaining the level of funding for small businesses and mortgages that happened in 2007.

He added that a further cash injection for the banks was not "the first thing anyone would think about at the moment".

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