Page last updated at 12:42 GMT, Monday, 23 March 2009

Q&A: US bank rescue plan

US dollar bills
The US Treasury says the plan will be better for taxpayers

The US is announcing details of a $500bn (343bn) plan to to buy up toxic assets from banks and other financial institutions in order to ease the credit crunch.

Why is the plan needed?

The US banking system is still troubled by bad loans which are widely held by banks, especially mortgages from people who are unable to afford the payments.

Because the banks are not sure how big their losses are, they have been reluctant to lend more money, thus contributing to the economic slowdown.

The plan will offer subsidies in the form of low-interest loans to private investors to encourage them to buy troubled mortgages and other loans from the banks.

But the government will back the plan with cash, and become a partner in eventually selling off the bad assets.

Who will pay?

The plan will initially aim to provide financing for $500bn of toxic assets, with the potential to expand up to $1 trillion.

The US Treasury will initially provide $75bn to $100bn, with the private sector contributing the rest.

But the US central bank, the Federal Reserve, will also provide some guarantees.

However, the government has decided that it cannot afford to fund entirely by itself the purchase of all the "toxic assets" owned by banks.

It also wants private sector help in deciding how much such assets are worth - something that has bedeviled previous plans.

Didn't the US already bail out the banks?

The US government did originally propose the purchase of these toxic assets in October 2008, when Hank Paulson was Treasury Secretary and George W Bush was president.

However, after the $700bn (488bn) plan was approved by Congress, Mr Paulson reversed course, and decided to use the first $350bn to directly purchase stock in the banks to strengthen their capital base.

Some of the remaining money will be used in this bail-out plan, but some has already been committed to other purposes, such as bailing out the US car industry.

The US Congress is reluctant to approve fresh funds to help the banking sector, after all the controversy about the big bonuses received by executives in banks which have been bailed.

How does this differ from the approach used by the UK?

The UK has taken a quite different approach.

It has arranged for the Bank of England to guarantee the banks against losses caused by their bad assets - for a hefty fee - but has not sought to purchase these assets directly.

Some banks have chosen not to take part in this asset guarantee scheme.

Will it work?

Most economists and world finance ministers believe that getting rid of toxic assets is vital for reviving the world economy.

However, there are concerns that the US private sector might be reluctant to buy up this toxic debt, especially when the financial sector is under attack by the Congress for its large bonuses.

If so, it would be difficult to see enough public money coming into the scheme to make it a success.

Previous attempts to involve the private sector in the purchase of toxic assets during the early stages of the financial crisis have not worked.

But financial markets have so far reacted positively to the new scheme, raising hopes that it will be widely accepted.

Print Sponsor

The BBC is not responsible for the content of external internet sites

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


Sign in

BBC navigation

Copyright © 2019 BBC. 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