Darling Sets Second U.K. Plan to Rescue Banks, Spur Lending

By Andrew MacAskill and Gonzalo Vina

Jan. 19 (Bloomberg) -- Chancellor of the Exchequer Alistair Darling announced the second British bank rescue in three months, proposing insurance to underwrite mortgage-backed debt and toxic assets and reversing plans to shrink Northern Rock Plc’s lending.

The Treasury also said it will increase its stake in Royal Bank of Scotland Group Plc as it converts the 5 billion pounds ($7.4 billion) of preferred shares it bought last year to ordinary stock, it said in a statement today. The government will extend a Bank of England program to inject money into the financial system.

“The likely impact of today’s announcement on the public finances will be mostly temporary, as investments will be held for no longer than is necessary to ensure stability and protect taxpayer interests,” the Treasury statement said.

The new measures would add at least 100 billion pounds ($149 billion) to the 250 billion pounds committed by Prime Minister Gordon Brown in October to underwrite a financial system choked with bad debt and reeling under the first recession in two decades. They increase the government’s grip on consumer and corporate banking and expose taxpayers to hundreds of billions in losses.

“This is a slow process of nationalization,” said Danny Gabay, a former Bank of England economist and director of Fathom Financial Consulting. “The insurance schemes help, but they deal with the symptoms rather than the causes of this crisis.”

The government will authorize the Bank of England to set up a 50 billion-pound asset-purchase program funded through the issue of Treasury bills. Starting Feb. 2, the central bank will buy assets including corporate bonds, commercial paper and syndicated loans, the government said.

Northern Rock

Northern Rock, which was nationalized in 2008, will repay a government loan at a slower rate so that the company can provide more mortgage financing in the U.K., the government said in a separate statement. Before today’s announcement, Northern Rock had been winding down its mortgage lending.

Brown’s renewed effort comes as U.S. President-elect Barack Obama considers a rescue that channels capital to banks and deals with troubled assets clogging balance sheets, according to people familiar with the matter. Darling is due to unveil the U.K. plan before markets open in London today. Obama takes office tomorrow.

Brown has criticized banks for failing to provide credit even after receiving the credit line and 37 billion pounds in new capital, steps that led to the takeover of RBS and its stake in Lloyds, which took over HBOS Plc.

U.K. banks and building societies approved the fewest new mortgages since at least 1999 in November, and lenders have told the central bank they will restrict lending further to companies and consumers. Loans to companies declined 6.2 percent in the year through November, according to the Bank of England.

Darling’s unprecedented insurance plan will leave the government underwriting the assets that investors fear could further weaken banks, a concern that has crippled lending and helped trigger a drop in global stocks last week.

To contact the reporter on this story: Gonzalo Vina in London at gvina@bloomberg.net