UK Bank Lending Package Could Come Next Week

New British government measures to boost bank lending could come as early as next week, a Treasury source told Reuters on Friday.

Officials are looking at a range of options to unblock frozen credit markets and plans to guarantee interbank lending are likely to feature high on the agenda of any package, the source said.

"The Chancellor (finance minister Alistair Darling) has always said something would be announced before the end of the month and it could come as early as next week," the source added.

A Treasury-sponsored report by James Crosby, former chief executive of HBOS, recommended last year that the Treasury guarantee mortgage-backed securities in an effort to get the home loans market moving again.

The government could even consider widening the scope of the guarantees beyond just mortgage-backed securities as many large companies are finding it difficult, if not impossible, to raise funding as a global credit crunch bites.

Policymakers are also considering ways of boosting confidence in banks so that they can start lending again if they feel they have adequate capital base.

"They (the authorities) need also to consider whether to do more to underpin the confidence among banks and among investors that is necessary to support the lending the economy needs to emerge from recession," Bank of England Governor John Gieve said on Friday.

Sharon Lorimer

The government stepped in to recapitalize the banks last year when they were teetering on the edge of collapse but the situation does look less fragile now, notwithstanding the latest U.S. $20 billion cash injection to Bank of America .

One way of soothing banks' concerns about their capital base might be to buy up their toxic assets -- the creation of a so-called bad bank -- but experts say that could run into its own problems and take time to have any effect.

One particular snag is how to value the toxic assets and the banks may try get a higher price for their assets if they know the governments will buy them up.

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