saraya al quds The government has said it is mulling further plans to encourage UK banks to raise lending to firms and households.

Chancellor Alistair Darling said that pumping more state cash into banks was not the "first port of call".

But he added that discussions would be held about what further steps could help thaw the loans freeze.

BBC business editor Robert Peston said the Treasury was eyeing an insurance scheme where banks would pay a fee to reduce potential losses on bad loans.

He added the scheme may encourage the banks to lend more freely because they would have a better idea of what losses they could face, while the state was sharing the risk.

The corollary of all this would be a significant increase in the risks and potential losses carried by taxpayers

Robert Peston
BBC Business Editor

Read Robert's thoughts
"My strong sense is that the Treasury is moving towards a plan that looks awfully like the Tories' proposal for taxpayers' to guarantee a proportion of lending to business," our business editor said.


The ability of businesses and homebuyers to obtain credit is seen as key to economic recovery.

And in October, three major British banks - RBS, HBOS and Lloyds TSB - were bailed out with £37bn package aimed at helping banks shore up their balance books and make affordable funding available.

But banks eager to escape further problems have drawn in their lending.

They now face a difficult balancing act between supplying the credit that is the oxygen for small businesses, and protecting themselves from the bad debts that got them into trouble in the first place.

Mr Darling admitted to the BBC that "although lending is taking place, it is not taking place at a level I would like to see".

"Recapitalisation is not your first port of call but over the next few weeks we will continue to discuss with banks what further steps we can take that would help lending, particularly to small- and...