Banking crisis: Taxpayer to underwrite loans in new 200bn bailout
Taxpayers - who have already stumped up £37bn to bail out High Street banks - will now be asked to underwrite the reckless loans made by banking executives.
The latest rescue deal could take Mr Brown’s total commitment to solving the banking crisis to almost £1 trillion (£ 1,000bn) in taxpayers’ money either spent or pledged since the credit crunch began in 2007.
Banks which have not yet taken public cash, including Barclays and HSBC are expected to give up shares to the state in exchange for taking part in the loan guarantee scheme.
And taxpayers are expected to increase their stake in the troubled Royal Bank of Scotland to more than 70%. A huge range of initiatives to be unveiled today by the Prime Minister and Chancellor Alistair Darling is expected to include:
• A ‘pay-as-you-go’ insurance scheme, which will see an uncapped amount of ‘toxic’ bank debt underwritten by the public purse
• A £100bn plan to kick-start mortgage lending
• A £250bn credit guarantee scheme underwriting the risk of banks’ lending to each other, due to expire in April, extended at least to the end of this year
• A separate project, allowing banks to swap loans for Government bonds, also extended
• The rules of last year’s bank bailout torn up so they have more freedom to start lending again
The package represents a huge political headache for Mr Brown, with polls yesterday suggesting the ‘bounce’ he enjoyed in response to his initial handling of the financial crisis has come crashing to an end.
Opposition MPs will seize on the new bailout as evidence that last year’s part-nationalisation was a hugely expensive flop. Taxpayers are also likely to resent being asked to shoulder the risk for dodgy lending by banks - much of it made overseas.
The loan scheme is likely to have a dramatic impact on the public finances, sending liabilities spiralling still higher.
But the Government is convinced that another massive taxpayer backed bailout is the only way to get credit flowing to families and businesses and unfreeze the lifeblood of the economy. Officials and ministers worked through the weekend to hammer out details of the package, with the Chancellor seeing bank chiefs for a series of crisis meetings.
Huge stock market falls on Friday, triggered by fears that banks are poised to admit vast losses and write-offs, added to the sense of urgency.
The Prime Minister, in the Middle East for talks on Gaza, said: ‘My first priority is hard-working families who are worried about whether they can afford or get a mortgage and businesses who work hard every day to employ people.
‘They need credit and lending to be made. They need the banks to do the job that the banks say they are there to do. What we want to see is for businesses to get the money they need to create jobs and secure any for the future.
‘What I want to see is people having access to mortgages at prices they can afford. That’s what tomorrow’s programme is all about.’
Officials insisted it was not possible to put a figure on how much taxpayers’ money will be at risk in the loan guarantee scheme, despite suggestions that it could be as much as £200bn. They said the Government was not putting any limit on the amount which could be underwritten. The total will depend on how many banks take part.
The scheme will see the taxpayer agreeing to underwrite loans which banks fear are at risk of default. The insurance will limit the banks’ losses on bad loans.
Instead, the taxpayer will shoulder the burden for decades to come and pick up the bill if families or businesses are unable to pay back the money they have borrowed.
Banks will have to pay a fee, which could be in cash or shares in their businesses, for the cover. They will have to give ‘contractual’ commitments to lend more in the future in exchange for taking part.
Ministers consider this system better than a state-owned ‘bad bank’ - which they have all but ruled out - because there would not be the need to find billions of pounds up front. A bad bank is an institution created by government to swallow poisonous assets sitting on the balance sheets of High Street lenders.
Purged of such bad debts, they are more able to resume lending. An announcement is also expected on new guarantees for mortgage-backed securities.