UK lends £100m to Iceland bank

A stricken Icelandic bank has been loaned £100 million by the Bank of England to keep it operating while efforts are made to get UK creditors' money back, it was announced today.

The loan, secured against assets of Landsbanki frozen by the British Government, is designed to ensure the institution can continue to operate in the short term.

Chancellor Alistair Darling announced the move in the Commons today after meeting with the Icelandic Finance Minister in Washington at the weekend.

An "accelerated payout" had been agreed in principle for individual savers, Mr Darling told MPs, but work continues to "facilitate claims by UK charities and local authorities on their deposits held at these Icelandic banks".

Town halls and charity bosses fear hundreds of millions of pounds of taxpayers' cash and donations could be lost as a result of the collapse.

"In addition, the Bank of England is today providing a short term secured loan of up to £100 million to Landsbanki to help maximise the returns to UK creditors," Mr Darling said.

Explaining the loan, a Treasury spokesman said: "My understanding is that Landsbanki has no working capital in it essentially.

"In order to provide the normal functions it would to its UK creditors, we are providing working capital to that business.

"That £100 million is secured against the assets we have frozen. If we weren't to do that there might be problems for certain businesses and charities that they would not be able to access the capital that they would need."

At an earlier press conference, Mr Darling urged the Icelandic government to face up to the scale of the problems in its financial sector and take "far-reaching action" to deal with them.

"I met the Icelandic finance minister in Washington on Sunday afternoon and I said to him that it is imperative that this situation is resolved as quickly as possible," he said.

"Last week, as soon as it became apparent that Iceland had decided to leave out British depositors from what they were proposing, we took action to secure assets of the bank.

"I have said we want to resolve that, but the Icelandic government needs to take a decision to resolve its own problems and they are reflecting on that."

He said: "We have protected retail depositors, but the key thing is that we resolve this with the Icelandic government.

"The Icelandic government has really got to face up to the fact that it has got substantial problems that can only be resolved by taking some pretty far-reaching action. In the meantime, I will do everything to protect our interests."

The news came as the Chancellor defended today's dramatic cash injection for the banks as a "significant step" to restoring confidence in the system.

In a Commons statement, Mr Darling said the measures were "essential to stabilise the financial system and help the UK economy".

He again stressed the need for governments to work together to counter the crisis, insisting it was increasingly clear that today's package formed "the basis of an international consensus on the right response to these events".

MPs cheered Mr Darling's disclosure that there would be no bonuses this year for board members of the banks seeking multi billion pound cash injections - HBOS, Lloyds TSB and RBS.

Shadow chancellor George Osborne agreed the bank rescue was the "only option" available to the country but warned taxpayers were in no mood to celebrate the "painful end to the age of irresponsibility".

The £37 billion lifeline thrown to the banks immediately sparked a rally in share prices.