UK Treasury Chief: Banks Must Clean Up, Rebuild

February 26, 2009

Britain’s banks must clean up their balance sheets and start rebuilding their operations, the Treasury chief said Wednesday as major lenders were in talks with the government for insurance of their shaky assets.

Writing in Wednesday’s edition of the Financial Times, Alistair Darling said the government’s asset insurance plan — which offers to guarantee against losses on bad assets, such as financial instruments based on the collapsed sub-prime mortgage market — isn’t a miracle cure, but will boost banks’ confidence so they can lend more and restructure their operations.

“The task for banks is to clean up their balance sheets and rebuild for the future,” Darling wrote.

“The challenge, for the government and for the banks, is to do this against a background of a sharply deteriorating global economy.”

The Treasury is negotiating with Royal Bank of Scotland and Lloyds Banking Group, both partly nationalized, on terms for participating in the program.

News reports suggest that the two banks may have up to 500 billion pounds in shaky assets that they may wish to insure. Barclays also is reportedly interested in the program.

The Financial Times reported that negotiations involving RBS and Lloyds have focused on the fee for insurance, which could be up to 6 percent, and how much of a loss the banks would have to absorb before claiming against insurance.

“In providing this protection, we will ensure that the taxpayer can benefit from the long-term recovery of the banks,” Darling wrote.

“It is important that the banks’ equity will continue to be owned by institutional and individual investors as well as by the government. That will make it easier for current and future investments in these banks to be returned to full commercial operation.”

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