Analysis: Three steps Darling must take right now

By ALEX BRUMMER, CITY EDITOR
Updated:

Alistair Darling

Alistair Darling should move to guarantee that all losses in failing banks will be looked after

The loss of confidence on stock markets around the world reflects the seeming inability of leaders to come to grips with the severity of the situation.

The go-it-alone, beggar-thy-neighbour approach in Europe which has seen a succession of countries guarantee bank deposits, has sown huge confusion among financial players and consumers.

Ideally, the leaders of the largest economies in the free world would be organising an urgent, behind-the-scenes meeting of finance ministers and central bankers, at which a series of coordinated actions would take place.

But at present political circumstances, most notably the American presidential elections, mean that policymakers have frozen in the headlights and seem incapable of making the kind of bold decisions which were eventually taken in the 1930s.

Britain, as the world's leading financial centre, could play a leadership role.

It is even more imperative given the fact that the UK's banking system is the most impaired in Europe by bloated housing prices, a credit explosion and exposure to American toxic debt.

Plainly, the cautious case-by-case approach of the Government is not working. Nor is the drip feed of announcements about help from the £40billion new banking liquidity facility offered by the Bank of England and the rise to £50,000 in bank deposit insurance.

The Royal Bank of Scotland, one of Britain's biggest beasts with interests stretching from NatWest on the high street to North America, saw a 20 per cent fall in its share price yesterday.

What we need now are the bold and comprehensive steps which have so far eluded the Government and Bank of England.

   

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The Monetary Policy Committee should cut bank rate by half a point to 4.5 per cent straight away, signalling a determination not to allow Britain to fall into slump.

The Bank has the capacity to hold an emergency session. But if it doesn't the Government should consider seizing back authority until the financial crisis passes.

Now that several countries across Europe have guaranteed bank deposits, it is time for Darling to replace the 'tacit' guarantee, the promise that depositors in any failing bank will be looked after, with a real promise to cover all losses retail and wholesale.

The commitment of resources would be colossal.

But it should instantly unclog the money markets because banks would no longer be scared to lend to each other because of the official safety net.

Finally, it should announce its intention to recapitalise the banking system as and when necessary.

It already effectively did this when it took control of Northern Rock and turned £3billion of debt into equity, giving itself a stake in the mortgage lender's future.

It should be willing to do the same for all banks taking shares in exchange for capital injections and security. This is nothing new for Labour.

It did precisely this for the nuclear generator British Energy when it ran into difficulty and came out with a big profit for the Exchequer just a few weeks ago.

Even announcing its willingness to do all of these things should make a difference.

It is time for caution at the Treasury and the Bank of England to be cast aside and for our leaders to measure up to the scale of a crisis which at present looks as if it has no end.

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