By Jason Simpkins
The United Kingdom earlier today (Monday) announced a second bank rescue package to shore up the nation's ailing financial institutions and boost lending. The package includes insurance for banks against further credit losses, guarantees for asset-backed securities, and the purchase of private sector assets.
The centerpiece of the plan is an insurance program, called the Asset Protection Scheme, which will guarantee U.K. banks' riskiest assets – specifically, those backed by mortgages and loans.
Financial institutions that take deposits and have more than $37 billion (25 billion pounds) of eligible assets will be the first to be included in the programs coverage. Those institutions will have to pay a fee to participate and must enter legally binding agreements requiring them to lend more money to creditworthy borrowers.
"In return for access to any government support, there will have to be an increase in lending, and that will be legally binding," said British Prime Minister Gordon Brown. "I will not sit idly by and let people and businesses go to the wall."
The government is also extending the $364 billion (250 billion pound) Credit Guarantee Scheme – which allows banks to issue bonds backed by the government – through 2009, and creating a new guarantee scheme for asset-backed securities, which will provide full or partial guarantees to top-rated AAA assets.
The sum of government guarantees will expose taxpayers to more than $150 billion (100 billion pounds) of liabilities, Bloomberg News reported.
Additionally, the Bank of England will create a special fund that will buy up to $73 billion (50 billion pounds) in higher-quality private sector assets, including short-term debt and asset-backed securities.
This latest package of initiatives is the second large-scale effort taken by the U.K. government to stem the growing financial crisis.
Last October, the Treasury pumped $63 billion into three of the nation's largest banks: The Royal Bank of Scotland Group PLC (ADR: RBS), HBOS and Lloyds TSB. It also agreed to backstop bank debt. But these measures failed to unlock credit markets as banks hoarded their cash instead of lending it out.
Britain's banks approved the fewest new mortgages in November since 1999 and told the central bank they would continue to hold back credit in the coming months, according to Bloomberg.
"These are comprehensive measures focused on one purpose: increasing the amount of lending that is available to families and to the businesses who are the backbone of our country and who want to invest and create jobs," Brown said. "This is not help for the banks but help for businesses and families."
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U.K. unveils second bank rescue plan