U.K. to Announce Mortgage, Loan Guarantees to Encourage Lending

U.K. to Announce Mortgage, Loan Guarantees to Encourage Lending


Jan. 18 (Bloomberg) -- The U.K. will underwrite mortgages and corporate loans to spur lending in a plan drawn up with Britain’s biggest banks, three people with knowledge of the situation said.

Chancellor of the Exchequer Alistair Darling is also working on an insurance plan that would underwrite toxic assets held by lenders, a person with knowledge of the plans said.

In a separate measure, the government will offer to swap its preference shares for ordinary shares to give the banks more cash, according to the Sunday Telegraph. This may lead to the government increasing its holding to 70 percent in Royal Bank of Scotland Group Plc and 50 percent in Lloyds Banking Group, the newspaper said.

Prime Minister Gordon Brown said his government will announce a further financial rescue tomorrow as the U.S. decides how to distribute the $350 billion remaining in its Troubled Asset Relief Program. Bank of America Corp., the largest U.S. bank by assets, received $138 billion of government funds last week.

U.S. President-elect Barack Obama is likely to back a financial rescue effort that channels capital to banks and deals with troubled assets clogging balance sheets, according to people familiar with the matter.

The new U.K. proposals expand government-funded measures aimed at kick-starting lending. In October, the Treasury offered 250 billion pounds ($367 billion) of credit lines to banks and set aside 50 billion pounds to recapitalize eight institutions. Alongside the program, the Bank of England extended its 200 billion-pound Special Liquidity Scheme until next year.

Dividends to Government

The Treasury is offering to ditch its preference shares because it is concerned they are choking banks preventing them from lending. Royal Bank of Scotland Group, Lloyds and HBOS Plc agreed to pay a dividend of about 12 percent as part of the government bailout, eight times the Bank of England’s benchmark lending rate.

Under the new program, the government will increase its holding in the banks and reduce the coupon to about 5 percent, according to a report to the Sunday Times. That will create as much as 1 billion of new capital for the banks, the newspaper said, citing no one.

The government measures are aimed at “getting lending moving in the economy” and will include banks declaring bad debts and losses, Brown told reporters in Egypt today.

The proposal comes as the U.K.’s main opposition Conservatives have doubled their lead over Brown’s Labour Party since last month on concern the economy is getting worse.

A YouGov Plc poll for the Sunday Times put the Conservatives at 45 percent, up four points since last month and 13 points ahead of Labour, who fell three points to 32 percent.

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