UK in dilemma on bank support

Britain faces a difficult balancing act in deciding how and when to reduce support for the banking sector, Moody's Investors Service said yesterday.

"The growth in the UK's public debt burden means the government cannot afford further substantial bank bailouts without further weakening its credit profile and/or burdening taxpayers," Moody's said in a report.

"However, at the same time, maintaining confidence in the financial system is vital for the economy."

The government and the Bank of England have helped the country's banks through the credit crisis in a number of ways, including a Credit Guarantee Scheme, a Special Liquidity Scheme and an Asset Protection Scheme.

Moody's said it expected this "extraordinary" support to be gradually withdrawn, but the government would have to be cautious before taking action.

"The government will need to be certain of the full standalone viability of the larger banks before it can hope to be confident in reducing the availability of extraordinary support," Moody's said.

The agency said it did not expect Britain's Special Liquidity Scheme and Credit Guarantee Scheme to be extended beyond their current terms. But it also said the credit crisis had showed that governments are determined not to let banks fail as a result of liquidity shortfalls, so that liquidity measures could be reinstated if needed.


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