A fresh rescue package for the beleaguered bank system will be launched today with the promise of a £14bn boost to mortgage lending by state-controlled Northern Rock.
It will be followed by moves to get money flowing by insuring banks’ “toxic assets” and approving “quantitative easing” – in effect printing money – by the Bank of England.
But the scale of the problems facing the banking sector will be laid bare this week when RBS announces Britain’s biggest corporate loss of around £28bn, and says that it will cut up to 20,000 jobs and put assets worth billions of pounds up for sale.
Gordon Brown last night appealed for banks worldwide to resume their traditional role as “stewards” of the public’s money and pledged to join a global drive to overhaul the financial sector. Growing dismay in Whitehall over the failure to get more money moving through the economy is leading to further shock tactics this week by the Government.
Northern Rock, which was taken into state hands last year, will announce today it is increasing lending to homebuyers by up to £14bn over the next two years – an estimated £5bn this year and £9bn in 2010. Treasury sources said today’s move would represent a “significant return to the mortgage market” by Northern Rock.
Over the last year the bank has had to reduce its mortgage book and pay off some of its debts to the taxpayer. Meanwhile, a scheme to insure up to £400bn of banks’ toxic assets by transferring them to a single “bad bank”, thus encouraging troubled banks such as RBS and Lloyds to start lending again, is close to agreement.
Mr Brown was among eight European leaders meeting in Berlin who agreed sweeping changes to the international financial system, bringing hedge funds and other parts of the “shadow banking system” under international supervision. The Prime Minister will discuss the reform blueprint with President Barack Obama in talks at the White House, with the aim of reaching agreement at the G20 summit of advanced and developing nations in London in April. Mr Brown said yesterday: “We have got to show we can restructure the banking system around sound banking principles that deliver the … trust and the openness and transparency that is essential for people to once again trust the banks. The Berlin meeting, which brought together leaders from Germany, Britain, France, Italy, Spain, the Netherlands, Luxembourg and the Czech Republic, also called for $500bn (£347bn) to be made available to the International Monetary Fund to enable it to prevent fresh crises breaking.
Earlier, Mr Brown made a direct appeal to Britain’s high street lenders, urging them to return to “traditional” banking practices and “prudent” lending. Writing in The Observer, he said he had instructed the Financial Services Authority to curb the issuing of 100 per cent-plus mortgages which plunged many borrowers into trouble when the housing market crashed.
The RBS will unveil its dramatic restructuring on Thursday, with its new chief executive, Stephen Hester, dismantling the empire assembled by his predecessor Sir Fred Goodwin.
He will create a non-core subsidiary into which about £300bn of unwanted assets will be placed. The aim is to isolate the troubled areas of the business into a “bad bank” and allow the stock market to place a value on the remaining core operations.