Leading article: Nationalise the banks – or pay later

The launch of the asset insurance scheme yesterday is a moment to take stock and consider the extreme weakness of the British banking sector. The fees charged to the Royal Bank of Scotland for access to the scheme are likely to put more than 80 per cent of that bank under state ownership. When Lloyds takes part in the insurance scheme, the Government could end up with a majority stake in that bank too.

Any remaining value for shareholders comes courtesy of the state in any case. Without the support of the Treasury and the Bank of England, the existing private shareholders of RBS and Lloyds would already have been wiped out. We taxpayers are taking on ever more risk too. Through the asset insurance scheme, the Government is taking on responsibilities to bear losses on the dodgy investments made by these banks. Finally, the Government is beginning to direct lending. In return for access to the insurance scheme, the banks will be told to increase by specified amounts their lending to households and businesses.

The Chancellor and the Prime Minister say they want the banks to remain in the private sector, yet what we are witnessing is a process of nationalisation by degree. The trends of ownership, risk and control all point in the same direction.

The Government ought to accelerate the process and take these banks into full public ownership sooner rather than later. A swift nationalisation would enable the Treasury to quarantine the lenders' toxic assets quickly and cleanly. It would also enable them to open properly the credit taps to those businesses that desperately need it. The taxpayer would also get more of the upside when the banks are sold back into the private sector, rather than merely absorbing losses in the downturn.

It is true that there would be complications resulting from nationalisation. The question of compensation for shareholders and bondholders is thorny. But that fight would be preferable to the drawn-out process we are witnessing. The banks need urgent restructuring; what they are getting from the Government is enervating and confidence-sapping gradualism.