The crisis in the banking sector will only be resolved when the toxic assets that caused the problem are entirely removed from the system. This may be as self-evident as a man in possession of a good fortune being in want of a wife, but governments and regulators alike have spent a lot of time and money trying to convince themselves otherwise.
The latest initiatives announced by the UK Treasury are a step in the right direction in that they propose to start buying assets. But they are only proposing to buy good assets; bad ones will just be insured.
The initiative involves an Asset Protection Scheme under which the Treasury will insure institutions against future credit losses on defined assets to the extent that they exceed a first-loss amount. The statement says that the scheme will specifically target those asset classes "most affected by current economic conditions" by which we can assume they mean bad ones. It will cover the "major part" of these credit losses which exceed the first-loss amount, as participating institutions will be required to pick up a further 10% of losses over and above the first-loss amount that they are already on the hook for.