The Chancellor Alistair Darling has announced that the Treasury is considering a nationalisation plan for the UK's banking system which would use billions of pounds of taxpayer's money to buy stakes in struggling banks.
While no decision about a contingency plan has yet been made, the Chancellor has said that the Treasury is "looking at some pretty big steps which we would not take in ordinary times", and has not ruled out a voluntary recapitalisation scheme for the banks.
It is thought that the plan would find some middle ground between a full-scale nationalisation scheme and offering more loans to the banks.
In order to give the banks sufficient capital strength to start lending again, the Treasury
, with the support of the Bank of England and the Conservative Party, would follow a similar path to the Swedish government when it introduced a similar scheme to divert a banking crisis in the early 1990s.
The plan would see the taxpayer taking an equity stake in banks, but is seen as preferable to the US $700billion rescue plan, whereby the American taxpayer's dollar will be used to buy toxic mortgage
The Tories have announced their support of the proposed scheme, dropping their opposition to state aid for the financial sector in favour of a recapitalisation rescue plan.
David Cameron, writing in the Financial Times today, said that "It is possible to imagine the circumstances in which government injections of capital, with proper safeguards and strict conditions, may be the best way to safeguard the long-term interests of the taxpayer."
While the plan poses a risk to the taxpayer, they will own a slice of equity in the banks, and will therefore benefit from any profit when, or if, the banks recover and the equity is sold in the future.
One way of putting the plan into practice would be to ask banks to present their case for why they should receive a portion of the bail-out pot.
Following the nationalisation of Northern Rock last year and Bradford & Bingley several weeks ago, the Treasury is keen to step in and help other struggling banks and put a contingency plan in place in case the financial crisis gets worse before it gets better.
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