Page last updated at 16:11 GMT, Friday, 16 January 2009

UK 'bad bank' plan to boost loans

Gordon Brown
Gordon Brown is looking at plans to "decontaminate" banks' toxic assets

Ministers are understood to be considering creating a state-owned "bad bank" as part of government plans to stimulate the UK economy.

It would accept "toxic assets" - risky loans on many banks' balance sheets - easing the pain of the credit crunch.

It is one of a number of options the prime minister and chancellor are expected to discuss during talks in the coming days with the banking sector.

The government is looking at measures to get banks lending again.

However, the BBC's business editor Robert Peston says that the "bad bank" envisaged "may yet fail to be born", because "there are huge difficulties in valuing the assets to be placed in them and in defining the assets that may be placed in them".

Intervention

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

The government is expected to announce a new package next week - which it hopes will stimulate lending to major businesses as soon as possible.

Shares in UK banks rose on Friday after several days of falls, which happened despite the unprecedented government intervention and recent offer of guarantees to support lending to small and medium sized businesses.

Gordon Brown and Alistair Darling are due to meet representatives from the Treasury, the Bank of England and several financial institutions in a bid to thrash out a deal.

BBC political correspondent Iain Watson said the talks would also look at what guarantees might have to be offered to encourage lending to homeowners too.

A Treasury spokesman said a package would be unveiled in coming weeks.

Among the other proposals being considered are plans to ring-fence those assets on banks' balance sheets.

But our correspondent said further direct government investment in the banks - a new banking bail out - seems less likely, although given the scale of the crisis this option has not been definitively ruled out.

We must secure the widest possible transparency and the necessary renewal of trust in the banking system

Gordon Brown

Mr Brown discussed the problem of the high-risk loans on Thursday following an interview with the German Chancellor Angela Merkel in Berlin.

The prime minister said action would be needed to deal with the "toxic" or "impaired" assets held by the banks.

Many were a result of the collapse of the sub-prime mortgage market in the US.

"We must secure the widest possible transparency and the necessary renewal of trust in the banking system. That is an essential element of rebuilding the global financial system," Mr Brown said.

"It will also require us to take action on impaired assets in the banking system and it will mean that we will have to have new standards of surveillance and supervision for global financial institutions."

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