UK Chancellor Alistair Darling is reportedly mulling a second bailout during the coming week for British banks with his October plan of injecting £37 billion to recapitalise Britain's banks to make them start lending again, having failed to ease the credit crunch.
Treasury sources told the media yesterday that the government led by Prime Minister Gordon Brown is mulling a second multi-billion pound cash injection into the British banking system to get credit flowing to home owners and businesses.
Apart from directly injecting cash into the banks, the government is also mulling options like asking banks to raise money from private sources while the government will give guarantees at a lower rate to banks or even buying their distressed assets on the assumption that once the banks are free of these unhealthy assets, they would start lending again.
In October last year chancellor Darling had unveiled a radical £50-billion emergency rescue plan for major British banks in a bid to stem the financial market meltdown and revive investor confidence. (See: UK launches 50 billion pound rescue plan for banks)
The radical plan, hailed globally as superior to the US Fed's and emulated by several European countries, envisaged part nationalisation of eight major British banks where the treasury would invest up to £50 billion in exchange for preference shares in eight of the country's largest banks - Abbey National PLC, Barclay's PLC, HSBC, HBOS, Lloyds TSB Bank, Royal Bank of Scotland and Standard and Chartered Bank as also the Nationwide Building Society.
The Bank of England also announced that it will make available £200-billion in short-term loans and issue £250-billion to guarantee loans between banks.
But in spite of injecting this massive amount of tax payer's money in the banks, bankers refused to lend as promised by them when availing the bailout money.
With 4.7 million small and medium size businesses in the UK hit by the credit crunch, Alistair Darling in November, threatened to nationalise banks if they refuse to lend to small firms and continue to levy high interest rates to homeowners and increasing the pace of repossessions at a time when the country is in recession. (See: Lend or face nationalisation, UK government tells banks)
Despite the threat, the Bank of England showed data last week revealing banks had scaled down lending in the last quarter of last year and might come out with more tighter lending norms in the coming months.
In November, new home loans plunged to a record low with banks approving only 27,000 mortgages and small businesses are squeezed by the lending drought and the car industry is in dire straits with no access to credit or able to get loan guarantees on commercial terms and the British government taking an eternity to come to a decision on bailing out the cash deprived auto industry.
The government feels that with banks refusing to lend due to insufficient capital will make the British economy slide deeper into recession in the coming months and face a severe contraction not seen since the Second World War.
But any plan to inject additional tax payer's money into banks will be met with huge oppositon from the Tories with shadow chancellor saying that a second bank bail-out would be an admission of failure.
The Liberal Democrat treasury spokesman, Vince Cable has said that his party would oppose the plans.