The Government has announced a second round of packages aimed at stabilising UK banks and encouraging lending. The measures will see billions of pounds of taxpayer’s money pumped into the effort to free up funds, which it is hoped with be lent to both homeowners and businesses. In the original round of measures last October, the Government committed £37 billion, but this round could go much further.
The package of measures includes an Asset Protection Scheme with banks being able to buy insurance from the Government against losses from certain investments. This could add up to £260 billion being underwritten, with the taxpayer footing the bill for any defaults. It’s hoped this move will give the banks more confidence to lend to both businesses and mortgage borrowers.
Under a new Asset Purchase Plan, the Bank of England will have the ability to buy up company assets, just as the Federal Reserve in the US is doing. Hopefully, the sale of these assets, will reduce those companies' borrowing costs, and ultimately help to safeguard jobs. The expected cost is up to £50 billion.
The Mortgage Guarantee Scheme will see the Government provide guarantees against bundles of mortgages, in an effort to make them more attractive to would be purchasers. This action was proposed by Sir James Crosby in his recent report into mortgage funding.
The Government also plan to push lenders into lending more money. The Nationalised Northern Rock has already said it will slow down the rate of mortgage redemptions, allowing more customers to stay with the bank. The lender was not specific on how this would be achieved, but it should mean that it would offer those that do stay more choice than its current offering of the Standard Variable Rate, and look to increase lending to new borrowers.
The part nationalised RBS group which includes Nat West, has promised to increase its lending, in return for the Government swapping £5 billion in preference shares for ordinary shares, which pay a lower return. This came on the day that RBS announced losses of £28 billion for 2008, which sent its share price tumbling.