Government ready to step in as banks take another hammering

World trade has slumped and there is little likelihood of things picking up this side of 2010

What is wrong with the banks?

It's all about confidence and the deterioration of the real economy. Before Christmas there was a consensus that the UK's national income would shrink by around 1% this year. Now economists are talking about 2% to 3%. A worse slump than expected means many more unemployed and thousands more homes repossessed. For the banks, that spells more pain as people default on their mortgages and turn good loans into bad ones.

Will our savings be safe, or are we another meltdown?

Last November the government faced the collapse of Royal Bank of Scotland and HBOS, the owner of Halifax. While the banks may need some more capital, and therefore come under even greater ownership by the taxpayer than they are now, the government is ready and willing to step in before things reach a new crisis point. Investments, whether in stocks and shares, property or in more esoteric assets like commodities, are another matter. They are all on the way down. World trade has slumped along with the US, European and UK economies and there is little likelihood of things picking up this side of 2010.

Is it the credit crunch part two?

The steep rise in bad debt is expected to trigger at least £40bn of bad-debt write-offs when the UK's main banks report their annual results next month. The collective figure could be as high as £200bn for all the losses on loans and investments. Banks argue they cannot get lending under way without putting a floor under their bad debt provisions. In other words, their finances are so battered by last year's credit crunch that they cannot help passing on the effects of the second wave credit crisis to consumers and businesses without further support from the government.

What are the plans to solve the crisis?

Top of the list is an insurance scheme that would effectively underwrite the loans of banks in trouble. A scheme could, for instance, leave the banks to pick up the tab for further falls of up to 10% in the value of assets they hold, leaving the taxpayer to reimburse them for the rest. The government is also considering pumping more capital into the banks to replace the money lost from a mass exodus of investors in the last week. Ministers could decide to forego the estimated £1bn a year the banks must repay on the money lent to them by the taxpayer. If the insurance scheme fails, we could become the proud owners of what will probably be called the "Bank of Reconstruction and Recovery", formerly referred to as a Bad Bank, that will take all the nasty, toxic loans off the banks' books.

Is a Bad Bank likely?

Not at the moment. Most people in the banking industry argue it would take months to determine which loans fit the bill and how much the government should pay the banks for them.

Why is Barclays taking such a hammering?

Hubris is the word that comes to mind for many observers. Barclays refuses to accept government money and is betting that its investment banking division will generate such huge profits they dwarf any losses on home loans. Rather than take government funds, it preferred to tap foreign investors who wanted a higher interest rate. Investors don't like this idea and they don't like investment banking any more, because it played a big part in the downfall of the international banking system.

The GuardianTramp

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