UK banking plan faces criticism

Gordon Brown says the government will do 'everything it takes' to support the economy

The government's latest plan to counter the economic downturn by encouraging lending has been criticised.

Opposition MPs argued that the government's measures were inadequate and too many details remained unknown.

Meanwhile Prime Minister Gordon Brown said the move, which centres on state insurance for banks, was essential to help protect jobs.

Business leaders have raised concerns over how much the plan will cost.

The latest government package is the second major set of measures to encourage banks to lend to individuals and businesses, as credit remains scarce or expensive to obtain.

On Monday banking shares ended down sharply, with Royal Bank of Scotland closing down 67%.

The bank's warning that it could see record losses for 2008 compounded worries about the state of the finance sector.

Four key points

Here are the key points of the government's latest announcement:

• Banks will be able to take up government insurance against their expected bad debts

• The Bank of England will be able to buy up to £50bn worth of assets in companies in all sectors of the economy

• Northern Rock has been given extra time to repay its loans from the government

• The government is increasing its stake in RBS to nearly 70% from 58%. RBS also said it was set to report a huge loss for 2008, with asset write-downs of up to £20bn.

'Turbulent times'

The prime minister said that without the new schemes, jobs may have been "needlessly" lost at healthy firms struggling to gain access to necessary funding.

"Good businesses must have access to credit," said the prime minister.

"It is because of this that we are taking the action to expand lending."

Shadow chancellor George Osborne said the details of Monday's package remained a "mystery".

Unless we are prepared to use the power of Government to get lending going again then the problems will simply be compounded as more and more firms get into difficulties Chancellor Alistair Darling See banking sector share prices The details of the latest plan Bank shares plunge Peston: Little to lift confidence

Mr Osborne added that the prime minister "hasn't saved this economy and he hasn't even saved the British banks yet".

Liberal Democrat treasury spokesman Vince Cable said the government's latest plans were inadequate, urging instead for the whole banking sector to be nationalised.

"The government must bite the bullet on the public ownership and control of the banks to ensure that lending is maintained to sound companies who can keep the economy ticking over in these turbulent times," he said.

The long list of policies includes a scheme to offer insurance against banks losing more money from the bad debts that started the credit crunch.

Meanwhile, the Bank of England is to be able to buy assets directly from firms.

The government would not reveal how much the latest plan would cost the taxpayer.

Insurance plans

Under the insurance scheme, banks will agree with the government the amount they expect to lose from particular debt.

The Treasury will then sell insurance against about 90% of the institutions' additional losses from the debt.

Chancellor Alistair Darling said: "Unless we are prepared to use the power of government to get lending going again then the problems will simply be compounded as more and more firms get into difficulties."

He told the BBC that banks taking out the insurance would have to make "very specific legally binding agreements to lend more money".

Under the Bank of England's new role, it will be able to buy up to £50bn of high quality assets, such as bonds and loans, directly from companies.

Vince Cable believes the government is not addressing the situation correctly.

Northern Rock extension

There have also been changes to the terms of previous bank rescues.

The government has given Northern Rock longer to repay its loans from the government.

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There was concern that the timetable for repaying the loans was forcing Northern Rock to reduce its mortgage lending too quickly.

Separately, RBS said it had agreed with the Treasury to swap the £5bn of preference shares the government holds for new ordinary shares, increasing the government's stake from 58% to nearly 70%.

The swap will reduce RBS's annual payments to the government as preference shares have a higher guaranteed rate of return than ordinary shares.

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An earlier version of this story implied there was a direct link between the announcement of the government plan and the sharp drop in the price of banking stocks. However we changed the wording of the story, because such a firm correlation cannot be established.