Page last updated at 13:43 GMT, Friday, 16 January 2009

How to get banks lending again?

A ten pound note frozen in ice

The Treasury and the Bank of England are expected to announce further steps to stimulate lending.

The prime minister and chancellor are expected to discuss a number of options in the next few days during talks with the banking sector.

So what might some of the new measures be?

CREATION OF A STATE-OWNED 'BAD BANK'

Such a bank would acquire "toxic assets" - risky or virtually worthless loans on many High Street banks' balance sheets - thus easing the pain of the credit crunch.

The main question for the government and the banks would be how to define and value these assets, as a bank would ideally like the government to pay 100,000 for a 100,000 "bad loan".

The government would risk losing a lot of taxpayers' money if it put too high a price on "toxic assets".

If you put too high a price on the stinky assets, taxpayers end up massively out of pocket
Robert Peston, BBC business editor

But undervaluing the assets would soon make the banks ask the government for more help.

Calling this body a bank is just a figure of speech, as the "bad bank" would not be a High Street bank with branches and customers.

A similar plan was discussed in the US in September, but has not been implemented.

In the 1980s, the US government set up the Resolution Trust Corporation (RTC) to take over the hundreds of failed savings and loan companies (S&Ls) and try to sell their assets.

"The bail-out cost about $300bn in today's money and when the RTC sold the assets, it made back about 80% of what it paid," says Professor Vaughan Williams at Nottingham Business School.

"To get back 80% on what were bankrupt assets could be called a success."

A NEW BANKING BAIL-OUT

The government may pump additional billions of pounds of taxpayers' money into major UK banks on top of a previous 37bn bail-out.

The aim of the autumn bail-out was to recapitalise the banks - in other words, to put them on a more secure financial footing.

In exchange, the government got large stakes in the banks.

In effect, it bought these banks' shares with the bail-out money.

But another such step would meet fierce opposition from those who resist directly injecting more of taxpayers' money into the banks that they hold responsible for creating the current crisis.

BBC political correspondent Iain Watson says further direct government investment in the banks seems less likely, although given the scale of the crisis, this option has not been definitively ruled out.

LOANS FOR TREASURY BILLS

Banks and other financial institutions may be allowed to swap all loans to individuals and businesses, which are hard to sell, for Treasury bills, a much more popular instrument among investors.

'SOVEREIGN WRAP' AROUND SOME BONDS

Purchasers of certain categories of bonds, including debt issued by some big companies and packaged mortgages, may be, in effect, insured against not being paid back.

It means that taxpayers' money would be used for repayment, if borrowers are unable to pay.

The measures is intended to make the bond market, which has significantly slowed during the credit crunch, more attractive by giving a government guarantee.

Print Sponsor



FEATURES, VIEWS, ANALYSIS
Has China's housing bubble burst?
How the world's oldest clove tree defied an empire
Why Royal Ballet principal Sergei Polunin quit

BBC navigation

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.

Americas Africa Europe Middle East South Asia Asia Pacific