Darling welcomes bank rescue plan

Chancellor Alistair Darling has welcomed a £50bn funding boost for banks to help ease the effects of the credit crisis.

Under the plan, banks will swap mortgage debts for government bonds to ease problems in the housing market.

Darling acknowledged that the global financial markets were "turbulent" but told MPs that the UK system remained "fundamentally strong".

The move would "help businesses, individuals and in particular, the mortgage market", Darling said.

And he insisted it involved "no subsidy to the banking sector" and that all the risk of falling asset value fell on the financial institutions, not the taxpayer.

Calling on banks to fully disclose losses "as soon as possible", he said that mortgage lenders were "required by statute to treat their customers fairly".

It is intended to stop the effects of the credit squeeze being passed on through mortgage lenders to companies and individuals.

Shadow chancellor George Osborne broadly welcomed the move but said: "Next time let's fix the roof when the sun is shining.

He told MPs the rules should be changed to "avoid boom and bust" and called on Darling to guarantee there would be "no loss to the taxpayer".

Osborne said the government should "stop fighting itself and start fighting for the country", saying it should do more to be "on people's side not on people's backs".

Market

Mervyn King, governor of the Bank of England, said: "The Bank of England's special liquidity scheme is designed to improve the liquidity position of the banking system and raise confidence in financial markets, while ensuring that the risk of losses on the loans they have made remains with the banks."

The Treasury said the initial £50bn could be extended if required, with one senior official telling the Times it could reach up to £100bn.

On Sunday, Darling said the government was "trying to unbung" the situation "so that the Bank will be making money available to the British banking system".

"It will be lending the money, so it's got to be repaid, and we will take securities in return for it," he told BBC1's Andrew Marr show on Sunday.

"But the idea behind it is that it will open up the market and it will begin the process of opening up the mortgage market which will help householders."

'Bail-out'

Conservative leader David Cameron said the package but must not amount to a "bail-out".

"I do support this package by the Bank of England, I think it's right, we've got to try to get the financial system moving again," he told BBC Breakfast.

"It really matters, though, that the Bank of England are embarking on something that is a sensible support package for banks, not some bail-out.

"We want to know that this is sensible measures to get the money supply moving again, not a bank rescue, not a bail-out for banks that have behaved badly."

Shadow chancellor George Osborne told BBC Radio 4's Today programme that it was important "to strike the difference between something that is a sensible intervention to help mortgage holders and unblock the financial system, and a bail-out".

He said that the government or Bank of England must ensure that "the taxpayer is protected" and stressed the need for the prime minister and chancellor to recognise that it was a central bank measure and not "jump all over it and claim it's their idea".

Losses

Liberal Democrat Treasury spokesman Vince Cable warned that the move could effectively nationalise bank losses.

"It is obviously necessary for urgent action to be taken to unblock the mortgage market and to break the crippling effects of the credit crunch," he said.

"However, we cannot have a situation where the banks are able to privatise their profits and nationalise their losses.

"Since the mortgages from the banks are of inferior quality and higher risk than the government bonds which they are replacing, the implication must be that taxpayers are shouldering the risks and losses of the banks. This cannot be right."

Calling for "urgent reassurances"  that taxpayers would not carry any losses, he said the government must ensure "the banks themselves cover those losses by stopping dividend payments and raising money from their shareholders".

"The cost of Northern Rock is quite enough without the government taking on all the other risks and losses of the banking sector," he said.