When the banks were recapitalised in October, it seemed that governments had at last moved ahead of the credit crisis. But it has recently become clear, as fourth-quarter results seep out, that the financial system was more damaged than had been realised. The fresh capital then injected into the sector was intended to enable it to issue new loans. But it was, instead, hoarded to pay for mounting losses from old investments. The UK government is now rightly making a new attempt to tend to the sector's injuries.
Over the coming weeks, some rickety banks will be protected against the toxicity of their existing lossmaking assets by government insurance. This sort of scheme has been used at UBS, Citigroup and, last week, Bank of America. Participating institutions would continue to hold illiquid securities, but the government would make good any losses that the banks suffered on specified portions of them beyond an agreed limit. As far as would-be investors are concerned, much of the risk of these unpriceable securities would be held by the state.
