Britain unveils 2nd bailout in bid to boost lending

Watched by Chancellor of the Exchequer Alistair Darling, right, British Prime Minister Gordon Brown told a news conference at 10 Downing Street in London on Monday that there would be a second rescue plan for Britain's banks.(Lewis Whyld/Associated Press)

The British government has announced a second bailout for banks that includes a plan to insure them against further losses in a bid to boost lending to individuals and businesses.

Under the package, banks are required to identify their riskiest assets and pay a fee to insure them with the government. The plan targets assets most affected by the economic crisis.

The banks must set out how much they expect to lose and then all but 10 per cent would be covered.

The residual amount provides institutions with an "appropriate incentive" to keep losses to a minimum, the government said in a news release.

British Prime Minister Gordon Brown said banks must enter legally binding agreements to lend more money to borrowers.

"The impact of today's announcements on public finances will be temporary, investments will be held for no longer than is necessary to ensure stability," Brown said. "We will protect taxpayers' interests, liabilities will be backed by assets and fees will be charged for the schemes that we are introducing."

Brown's plan will see £50 billion (about $90.6 billion Cdn) set aside to create a special fund for the Bank of England to buy high-quality loans and other assets directly from banks. That plan is also aimed at bringing down borrowing costs.

“There’s been a lot of money put into the banks, but not much has come out to the people who need to borrow it. As a result, we’ve got a lot of businesses getting into difficulties because they can’t get the cash," Matthew Bishop, the Americas Business Editor for The Economist told CBC News.

”Unfortunately, although I think it’s a step in the right direction, the scale of the British plan is still relatively small,” he said. “I suspect if this latest scheme to encourage lending actually does work, then we’ll see other governments around the world follow suit and that will have a co-ordinated effect that means the recession won’t be as bad as it might be.”

Though some experts worried that another bailout could strain public finances, Treasury chief Alistair Darling defended the plan.

He said it was needed because a first bailout announced in October, worth about £37 billion (about $68 billion Cdn), had not done enough to boost the economy and restore bank lending to needed levels.

"Banks all over the world have got themselves in huge difficulties and frankly governments all over the world are having to sort the problem out," Darling said.

Last October, the British government announced it would partly nationalize its major banks.

Bank losses

Also Monday, the Royal Bank of Scotland revealed that its losses for the full year could be as high as £28 billion.

That would mark the largest loss by a United Kingdom corporation.

In an announcement Monday, the bank said it expects a "break-even underlying financial performance after credit impairment losses."

It said profits in retail and commercial business in the U.K. had been offset by losses in its global banking and markets division.

Brown said the government has increased its stake in RBS from 58 per cent to almost 70 per cent, but declined to say whether he believed the bank would eventually be fully nationalized.

With files from the Associated Press