The prime minister has demanded that banks admit how many “toxic assets” they have on their balance sheets.
Gordon Brown told the Financial Times the banks had to “come clean” about these bad debts so that people could trust them again.
He refused to rule out further bank nationalisation plans or injecting taxpayers’ money into the sector.
The government is expected to unveil new measures next week to stimulate lending to major businesses.
Mr Brown said: “One of the necessary elements for the next stage is for people to have a clear understanding that bad assets have been written off.
“We have got to be clear that where we have got clearly bad assets, I expect them to be dealt with.”
Mr Brown said unless this issue was resolved there was a risk of banks retreating into “financial isolationism” where big banks retrench from the global market into their domestic markets.
He said Royal Bank of Scotland (RBS), which is 60% part-nationalised, had begun retreating from investing overseas – but international co-operation was essential if the global credit market was to be revived."It’s the same problem of access to the banks and to funding"
Gordon Brown UK ‘bad bank’ plan to boost loans
Read Robert Peston’s blog How would a ‘bad bank’ work
On Friday Mr Brown and Chancellor Alastair Darling took part in discussions with the Governor of the Bank of England, Mervyn King, and Financial Services Authority chairman Lord Turner of Ecchinswell.
The meeting came as it emerged the government was considering plans to use billions of pounds of taxpayers’ money to create a “bad bank” which would buy up the “toxic assets” from the banks – leaving them free to lend again.
However, the BBC’s business editor Robert Peston says that the “bad bank” may yet fail to be born, because “there are huge difficulties in valuing the assets to be placed in them and in defining the assets that may be placed in them”.
The move comes as it was reported that shares in major UK banks fell sharply.
On Friday it was announced that Barclays was worst hit, down 25%, while RBS closed 13% lower.
Among the other proposals being considered are plans to ring-fence those assets on banks’ balance sheets.
The government has already attempted to shore up the banks with a Â£37bn recapitalisation scheme, but this failed to kick-start lending.
A Treasury spokesman said a package would be unveiled in coming weeks
This article is from the BBC News website. © British Broadcasting Corporation
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