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Brown tightens grip on banks

PRIME Minister Gordon Brown's government tightened its grip on Britain's financial system, guaranteeing toxic assets and giving the Bank of England unprecedented power to buy securities.

The plan will increase the cost of bailing out the nation's banks by at least 100 billion pounds (US$147 billion), the Treasury said in a statement yesterday.

"This is aiming to once and for all to underpin faith in the banking system," said Alan Clarke, an economist at BNP Paribas SA in London. "We're breaking all conventions. The availability of credit is going down and the economic outlook is getting worse, so the government is having to throw more and more at it."

The new measures are the biggest steps by Brown to get banks lending again as Britain slides deeper into a recession that may be the worst since the aftermath of World War II. The government will require aid recipients to sign "specific and quantified" agreements to lend, reflecting Brown's frustration at the failure of an October rescue to unlock credit markets.

"What I'm doing today (Monday) is putting in place a range of measures that are all designed to get lending going again," Chancellor of the Exchequer Alistair Darling told Sky News.

Britain's economy may contract 2.7 percent this year, the most since 1946, and house prices may plunge 22 percent in the next one and a half years, the Ernst & Young Item Club said yesterday.

The yield on the UK 10-year government bond rose 9 basis points to 3.381 percent. The pound was little changed at US$1.4715 at 8:41am in London, Bloomberg News reported.


Under Darling's unprecedented insurance plan, the government will charge a fee to guarantee about 90 percent of banks' potential losses on assets that could further erode their capital. Concerns about these toxic holdings have hit lending and sparked a drop in global stocks last week.

The Treasury is extending the 250 billion-pound Credit Guarantee Scheme it opened in October as part of the first round of the bailout. The program allows banks to issue bonds backed by the government and will now run until the end of this year.

"It looks to us as though this scheme, this insurance where you can put a floor under valuations, is very important," said Angela Knight, chief executive of the British Bankers' Association. "We favor this from the government."


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