Taxpayer-Funded Insurance for UK Banks

- Taxpayer-Funded Insurance for UK Banks -

In an attempt to revive consumer confidence in the banking industry, the Treasury will soon announce plans to underwrite the bad loans of UK banks with taxpayer funds. The plan would enable banks to pay a fee to have a certain portion of their bad loans underwritten by taxpayers. The U.K.’s biggest banks continue to flounder, which is what spurred the creation of the Treasury’s new insurance scheme. Read on for more information about the plan and how it will affect the banking industry.

Purpose of the Plan

Treasury officials and major bank executives spent the weekend of January 17, 2009 in talks over the plan. According to economic experts, the purpose of the plan is to provide more certainty to investors. As the recession undercuts many borrowers’ ability to repay their debts, investors stand to face considerable losses. The Treasury’s plan aspires to mitigate these losses and allay investor fears. The Treasury would require the banks to disclose all of their toxic assets, or bad loans and unwise investments. Ideally, the Treasury will unveil the plan prior to the announcement of historic losses by HBOS and the Royal Bank of Scotland.

The Crisis

The ongoing efforts of Prime Minister Gordon Brown to manage the global financial crisis were part of the impetus for the Treasury’s new plan. Brown has vowed to adopt measures in Britain to alleviate consumer concern about the security of their savings so lenders can continue to provide mortgages and extend loans to businesses. The Prime Minister has urged banks to come clean about their bad debts in order to regain the trust of the people. According to Brown, banks need to make it clear to the people that they have written off their bad debts.

Previous Attempts

The Treasury spokesman, Vince Cable, said that the Treasury must attend to other matters before an insurance scheme can be applied. He questions where the 37 billion pounds of taxpayer money that were already devoted to the banking system went. Apparently, this money was intended to return to the system in the form of new lending, but the Treasury is not seeing such results. Consequently, many financially sound British companies cannot get credit from banks, which exacerbates the existing crisis. If these companies cannot raise credit, Cable argues, then they will collapse and take thousands of jobs with them.