New bank bail-out to cost billions

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Officials worked throughout the weekend to finalise the second bail-out in three months which is expected to see the Government increase its stake in the banks while underwriting up to £200 billion of so-called "toxic assets".

The Treasury had been looking at the proposals for some weeks after it became clear that the initial £37 billion bail-out in October had failed to provide a sufficient platform for normal lending to resume.

However they were given added urgency by Friday's dramatic stock market falls amid fears that the banks were set to reveal further massive write-downs in the forthcoming results season.

Gordon Brown, in Egypt for an international summit on the Gaza crisis, said that the measures were intended restore lending to businesses and households amid fears that the shortage of credit is driving Britain deeper into recession.

"We know that the essential problem, that has been held back by what has been happening internationally over the last few months, is the resumption of lending and the expansion of lending," he said.

"What we want to do is see businesses get the money that they need to be able to create jobs and secure investment for the future. What I want to see is people who are mortgage holders having access to mortgages at prices they can afford. That's what tomorrow's programme is all about."

It appears that the plan has two main elements. One involves an insurance scheme for the "toxic assets" which the banks were left with after the collapse of the sub-prime mortgage market in the United States. Under such a scheme, the banks would pay a fee to have their bad loans underwritten by the taxpayer up to a certain level.

This would help "ring fence" the bad assets - estimated at around £200 billion - and limit their losses, freeing-up capital which could then be used to lend to individuals and businesses.

The second element could see the Government ease the terms of its original bail-out in which it took preference shares in some of the banks. These carried an onerous 12% rate of interest, encouraging the banks to pay them back as quickly as possible at the expense of lend.