Page last updated at 16:23 GMT, Wednesday, 19 November 2008

Clegg proposes 'government bank'

Nick Clegg
Mr Clegg says nationalised banks like Northern Rock must do more

The government should consider lending directly to businesses and mortgages as banks fail to live up to promises to lend more, Nick Clegg has suggested.

The Lib Dem leader says the government has been "supine" and "weak" in not forcing banks to act, despite giving them billions of taxpayers' pounds.

Mr Clegg said these were "not normal times" and solvent businesses were being put at risk by lack of funding.

The Tories say they are looking into government guarantees for loans.

There was "growing public anger" and urgent action was needed, he added.

Mr Clegg says the government should lend directly to companies through the Post Office, local authorities or even by creating an entirely new bank.

The government has made its multi-billion pound bailout of three of the UK's largest banks conditional of them restoring the level of funds available to small businesses to 2007 levels.

But the Lib Dems say that despite this, lending rates are still low.

'Bad bank'

Mr Clegg told BBC Radio 4's Today: "There is growing anger that the banks aren't lending money. The government should put pressure on the banks and encourage them to lend. If they're not prepared to get tough with the banks we need a plan B.

"You could lend directly into the economy - it is a huge step, but if the government isn't prepared to lift a finger we need to do something and do something fast. We have to look at ways to get money back into the real economy."

Mr Clegg says a new bank could be set up to channel money to firms, but he admitted that would take some time.

Instead the government could look at "bashing" the effectively state-run Northern Rock and Bradford & Bingley Banks together, clearing high risk loans from their balance sheets and getting them to lend more.

He also said that some of the larger councils should be able to lend directly to the mortgage market.

There was also the possibility of setting up a special "bad bank" to take on the "toxic debts" of nationalised banks such as Northern Rock - which could eventually be sold on by the government when market conditions improve.

Cameron and Brown

"What we are saying is that there are a number of other ways that we need to explore of getting money back into the economy if the banks are refusing to do so," he told BBC Radio 4's Today programme.

"This is a complete departure from the kind of banking practices you would want to see in normal times, but these are not normal times."

The issue was raised by Mr Clegg at prime minister's questions - and by Conservative leader David Cameron who called for more direct measures to get lending to businesses restarted and the establishment of "new institutions" to underwrite lending.

A spokesman for the party said there was no proposal to set up a new government-backed bank like the one being considered by the Lib Dems - instead an arm of the Treasury would issue guarantees on loans given to businesses via existing banks. Those loans would be given at a "reasonable rate".

Gordon Brown said the government would take "all measures necessary" to get the banks lending again to small businesses, with proposals due "very, very soon indeed" to get the banks to "accept their responsibilities".

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