‘Bad banks’ to unfreeze money markets

By politics.co.uk staff

The government is considering establishing a controversial ‘bad bank’ to buy up toxic assets that are at the root of the credit crisis.

In a strong hint to the media after meeting German chancellor Angela Merkel in Berlin, Gordon Brown said action must be taken on the risky assets that are preventing banks from lending to each other.

Mr Brown said: “We must secure the widest possible transparency and the necessary renewal of trust in the banking system. That is an essential element of rebuilding the global financial system.

“It will also require us to take action on impaired assets in the banking system. It will mean that we will have to have new standards of surveillance and supervision for global financial institutions.”

Ministers are thought to be meeting with senior banking executives over the weekend to hammer out a plan.

The scheme would see a new state-owned bank set up, funded by the taxpayer, that would take on billions of risky assets from banks in a bid to unfreeze the money markets.

There have been suggestions Northern Rock could be used for the purpose.

City experts believe the action is necessary as banks are still reluctant to lend to businesses and individuals, despite a substantial rescue package from the government.

While banks are unable to unload the bad debts, the credit crisis is likely to continue as they cannot take on new business.

The problem has become more urgent recently as high street banks prepare to release their financial results for 2008, sending shares in the sector plunging.

In the US last night, the government pumped $20 billion into Bank of America, with $118bn worth of guarantees against bad assets, as the US Treasury took a stake in the bank.

The cash call was deemed necessary after the losses Bank of America faced after it took on Merrill Lynch at the height of the credit crisis last year.

In Ireland last night, the Irish government nationalised Anglo Irish Bank to secure its position after a recapitalisation plan was deemed insufficient.