The government of Prime Minister Gordon Brown announced on Monday a new bailout for the British financial system that increases its control over lenders, saying it would offer banks insurance on troubled assets and take other measures to restore credit and support the foundering economy.
The government also said it was revising the terms of its bailout of Royal Bank of Scotland, raising its shareholding in the institution from about 58 percent to about 70 percent.
Speaking at the prime minister’s 10 Downing Street residence in London, Mr. Brown placed the blame for the financial crisis on “irresponsible lending” by the banks and said institutions that took advantage of the new measures would have to sign a legally binding agreement with the government to provide more credit to consumers and businesses.
The British Treasury said the latest steps would cost taxpayers another £100 billion, or $147 billion, on top of the £37 billion plan announced in October and a £20 billion stimulus plan announced in November.
The new measures have become urgent as British home prices slide and measures of economic activity grow increasingly dire. The British economy is expected to have shown a sharp contraction in the fourth quarter, and a major slowdown is forecast for 2009.
Pointing to efforts by governments in Europe, the United States and Japan to address the financial crisis, Mr. Brown stressed the global nature of the problem, saying: “It is clear that no country can solve what is truly a global crisis on its own.” He said the British authorities would be working with their counterparts overseas in the coming weeks to work for a global financial regulatory system at a Group of 20 nations meeting in April.
In Brussels, the European Commission warned Monday that the 27-nation European Union faced a “deep and protracted recession” and predicted that the bloc’s economy would shrink 1.8 percent in 2009, accompanied by the loss of 3.5 million jobs.
Under its new asset insurance plan, the British Treasury said it would “protect financial institutions against exposure to exceptional future credit losses on certain portfolios of assets” in return for a fee. Participating institutions will take the initial losses, with the Treasury bearing most of the rest — on the order of 90 percent. Additionally, the Bank of England has been authorized to establish a fund for purchasing up to £50 billion of “high-quality assets” from banks and other financial institutions.
The government is also extending measures introduced under the October plan to increase liquidity in the financial system, including a £250 billion program under which banks can issue government-backed bonds.
The British authorities said they had no interest in being a permanent investor in the country’s financial institutions and that they would eventually dispose of the shareholdings “in an orderly way.”
Underscoring the dismal state of the British financial system, the Royal Bank of Scotland Group said it expected to post a full-year net loss before exceptional items of up £8 billion, or nearly $12 billion, and an additional goodwill write-off of as much as £20 billion. Shares of RBS, which will report its full 2008 results on Feb. 26, fell 23 percent in morning trading Monday.
Barclays rose 7 percent, after declining 25 percent Friday amid fear that it would seek a massive new capital increase. The bank said its 2008 pretax profit would beat market expectations of £5.3 billion.
The British strategy follows a surge of criticism that — like in the United States — the plan Mr. Brown devised at the height of the financial crisis has not stimulated bank lending, even as the economy hurtles toward recession. Last week, shares of British banks plummeted on renewed fears that banks worldwide would be hit with larger write-downs, and face the possibility of nationalization. The opposition Conservative Party has scored points against Mr. Brown’s Labor Party with criticism that Brown’s original bank plan was inadequate.
With a 2010 deadline for a general election, the extent to which Mr. Brown’s latest plan was perceived as successful could have a significant effect on his political fortunes.
The British move comes as the United States throws a second lifeline to Citigroup and Bank of America, and considers new ways to relieve banks of their troubled assets using hundreds of billions in new money from the Troubled Asset Relief Program, known as TARP.
In Washington Sunday, David Axelrod, a top adviser to President-elect Barack Obama, said on ABC’s “This Week” program that the second half of the $700 billion TARP fund, to be released after Mr. Obama takes office, must be administered in a way that will get “credit flowing again to businesses and families across the country. That hasn’t happened with the expenditure of the first $350 billion.”