Fresh efforts have come from the government to help banks recover from the effects of credit crunch and in turn kick start the British Economy. As part of the Bank Bail-out plan, insurance programs will be rolled out to banks to ensure they stop losing money on bad debts, which is seen as the starting point of the credit crunch.

The government initiated insurance plans will protect banks against bad credit and bad mortgage debts. An insurance program will be set up by the government to ensure that banks assets are not under risk anymore. The hope is to help banks to start lending to individuals and businesses which is essential for the recovery of the economy. The Prime Minister Gordon Brown is very positive that this bail-out plan will be a turning point for the recession stricken British economy. Under this new insurance scheme backed bail-out plan, banks have to work closely with the government. The treasury will set up insurance programs that will meet up to 90% of the additional loss suffered by the banks due to bad debts.

By helping banks to recover faster from their losses and protecting them from further loss, the government hopes that they can resume their normal business. Taking insurance from the government will also bind the banks legally to lend more to individuals and businesses. The government is encouraging the banks to start lending to businesses as well as individuals under the new bail-out plan. This will ultimately help small businesses and individuals who are finding it extremely difficult to get any credit these days. However, the banks will be paying for the insurance though not in the form of shares.

Bank of England, which was buying assets only from financial institutions and other banks so far, will be able to now buy assets from all types of companies directly. It will be able to buy assets for up to £50bn. The acquisition of the assets will be done by a subsidiary company that is set up for this purpose. However, the bank’s executive will still be the one who will decide on the companies from which the assets will be bought and the nature of the assets to be bought. Corporate bonds are included in the list of assets and this makes it possible for companies to borrow money from the Bank of England directly.

There are mixed opinions about the latest bail-out plan from the government. For instance, Vince Cable, the Liberal Democrat treasury spokesperson says that nationalising the entire banking sector would be the ideal solution rather than offering insurance schemes to encourage banks to lend more. He reckons this will be a very slow and long winded process to recovery. Its more of a gamble then anything else.

Under this insurance based bail-out plan, banks or financial institutions with over £25 billion of eligible assets will get first preference for the insurance program. Furthermore, there was an announcement from the government that it is increasing its stake in RBS by 12%. This takes the figures from 58% to 70%.