The Treasury is considering plans to develop a so-called “bad bank” in order to hold stake in bailed out companies, the Sunday Times reported, amid fears that key firms could fail due to the coronavirus pandemic.
The initiative reflects similar steps taken by the Labour party during the 2008 financial crisis, when it set up UK Financial Instruments to manage the mortgage books of failed banks like Northern Rock.
The plan is being led by UK Government Investments, which currently manages the government’s stake in Natwest.
Possibilities for the emergency measures include an “asset resolution” scheme to return value to the taxpayer, and a sovereign wealth fund, the Sunday Times said.
Thus far, struggling companies have been able to drawn down billions in commercial paper and other loans through the Bank of England and high street banks, but ministers are said to be afraid that the measures will not be enough to protect some critical UK firms.
If the recovery from the crisis ends up taking longer than hoped, the state could become the lender of last resort and provide companies with debt which could be swapped for equity at a later point.
Some key firms, such as Tata Steel or Jaguar Land Rover, do not qualify for existing state loan schemes due to their size, and are running out of other funding options.
Last month it was reported that the former firm needed £500m for its steel works at Port Talbot, with local MP Stephen Kinnock calling on chancellor Rishi Sunak to lift the emergency lending cap for larger businesses.
In return for rescue cash, sources said that the government could ask for preferential shares in such companies, as well as high interest rates.
City A.M. has contacted the Treasury for comment.