Britain tries another bank rescue: insuring bad assets

LONDON -- Britain announced a second rescue plan for the country's ailing banks Monday, hoping to thaw lending by offering to insure banks against large losses on bad assets they hold.

Prime Minister Gordon Brown said the government will offer to insure banks against default on toxic loans in exchange for legally binding commitments to make credit more available to British businesses and home buyers who are struggling in an economic downturn.

The announcement coincided with a report by the Royal Bank of Scotland saying its losses for the full year could be as much as 28 billion pounds ($41.3 billion), which would be the biggest loss ever by a British corporation.

Brown confirmed that the government has increased its stake in RBS to almost 70%, but declined to say whether he believed the bank will eventually be fully nationalized.

RBS shares fell 25% in morning trading on the London Stock Exchange, but Barclays was up 19%, regaining ground lost in a late sell-off Friday. Lloyds Group was up 1.6% and HSBC was little changed.

Brown and Treasury Chief Alistair Darling acknowledged that October's pledge of 37 billion pounds (about $55 billion) to bail out Britain's banks hadn't done enough to encourage them to resume normal lending.

Brown said stimulating lending is vital to spark Britain's economy and to try to limit job losses as Britain tackles a recession prompted by the global downturn.

"Good businesses must have access to credit. Jobs should not be lost needlessly," Brown told reporters at his Downing Street office. "It is because of this that we are taking the action to expand lending."

Britain's Treasury said the government will offer to insure banks against losses on about 90% of specific toxic loans. The plan would require banks to identify their riskiest assets which, for a fee, could be insured with government backing.

It's hoped the offer will reduce anxiety in the banking sector about the value of past investments, boosting banks' confidence to offer new loans.