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U-turn: Bank of England Governor Mervyn King

Britain's stricken lenders were thrown an astonishing lifeline worth up to £280billion yesterday as Gordon Brown finally took decisive action to prevent an economic crash.

In a major concession to the City, the Bank of England announced a series of special loans for struggling High Street banks, in a desperate attempt to prop up the financial system.

The moves came as the City watchdog said it will lift the guarantee on families' deposit accounts from £35,000 to £50,000 or even higher, as it scrambles for a response to Ireland's promise of a 100 per cent safety net.

The Government was stung into action after claims that its response to the mounting financial crisis has been woefully inadequate.

The Bank of England's massive cash infusion also represents a significant climbdown by Governor Mervyn King, who has been infuriating City bosses - and senior ministers - with his hardline approach towards struggling banks.

On another day of wild gyrations on stock markets:

• In Washington the House of Representatives provoked widespread relief by approving the White House's $700billion Wall Street rescue.
• Bank of England interest rate-setter David Blanchflower said he will vote for a reduction next Thursday, amid widespread calls in the City for a half-point rate cut.
• Figures showed Britain's services sector, which includes High Street shops, restaurants and bars, tumbled into recession, as retailer John Lewis announced a slump in sales.
• The Prime Minister created a National Economic Council to tackle the credit crisis.
• Mr Brown also said that he will push for an emergency EU programme of loans for struggling businessesat a credit crunch summit in Paris today.
• But he played down expectations that a U.S.-style toxic asset dump could be introduced across Europe.

Yesterday shares in Halifax Bank of Scotland surged 14.5 per cent, Lloyds TSB climbed 10 per cent and Barclays rose 7 per cent in the wake of the announcement of a major UK loans scheme.

The lenders led the FTSE 100 index of blue chip shares to a 109 point rally, finishing at 4980.25.

In a statement, Mr King said: 'In these extraordinary market conditions, the Bank of England will take all actions necessary to ensure that the banking system has access to sufficient liquidity.'

The Bank will offer a series of three-month-long loans to High Street lenders starting next week and continuing until at least mid-November.

The first installment will be worth £40billion. If future amounts are at least that large - in a scheme that could eventually add up to £280billion - this will turn out to be the Bank's biggest ever loan programme.

City insiders described it as a Uturn by Mr King, who has been accused of taking a 'Victorian' approach to the banking sector.

It follows an emergency meeting on Tuesday at which Mr Brown and Mr Darling forced Mr King to be more generous with beleaguered lenders.

Mr King had previously battled against audacious behind-the scenes plans by Mr Brown for a U.S.-style bail-out fund or even an Irish-style guarantee of all bank deposits in Britian.

One banker said: 'Is Mervyn King's arm being twisted? It's being bloody broken at the moment. The Chancellor is doing all the pushing, and Mervyn is a bit detached. This development is very positive.'

Officials hope the loans will encourage banks to do business with each other, increasing the flow of credit into the broader economy.

In a major boost, High Street bankers will be allowed to borrow the money against a much broader range of collateral in the scheme.

Until now the Bank has lent only against ultra- safe, bundled-up mortgages. But it will now temporarily take consumer and corporate loans from stricken lenders' books.

Economist Alan Clarke of BNP Paribas said the Bank's initiative could encourage firms to do business with each other, but was no miracle cure.

He said: 'There is enough blood on walls that action needs to be taken. This is a step towards freeing up the logjam in the system.

'But there is still distrust between the banks. The move doesn't alleviate the uncertainty over who else is carrying timebombs on their balance sheets.'





Source: Daily Mail UK., October 4, 2008

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