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WASHINGTON — The British government Monday boosted its stake in troubled Royal Bank of Scotland to almost 70 percent and offered to insure banks against large-scale losses on risky assets in exchange for agreeing to lend more money.

It was the second major British bank bailout in three months. Shares of ailing RBS, parent of Citizens Financial Group of Providence, R.I., lost two-thirds of their value in Monday’s trading. Shares of other European banks plunged as investors worried that one or more banks could be nationalized.

Officials on both sides of the Atlantic have failed to contain the most severe credit crisis in decades. Now top officials from 10 Downing Street to 1600 Pennsylvania Avenue are scrambling to figure out how to stop the bleeding as they prod banks into lending more money.

U.S. officials are talking about a new government-backed bank to remove bad loans and other toxic assets from banks’ balance sheets.

Still, figuring out a successful strategy for how to unclog the credit markets is a vexing challenge. President-elect Barack Obama’s top economic adviser, Lawrence Summers, said on CBS’ "Face the Nation" Sunday that "the focus isn’t going to be on the needs of banks. It’s going to be on the needs for credit."

While the British government moves closer to a full takeover of its banking system, Americans are leery of such intervention.

"We’re much less comfortable with nationalization," said Simon Johnson, former chief economist to the International Monetary Fund.

The U.S. government has so far provided $192.3 billion to 257 large and small financial institutions in 42 states and Puerto Rico. Now the government is facing calls to use its power to fire executives at banks that receive government aid. "What you really need is a change of management," Johnson said.

There is a precedent for the idea of a government-run "bad bank" that would assume toxic assets, making it easier for banks to lend new money: the Resolution Trust Corp paydayadvance., created in 1989 to dispose the assets of failed savings and loans.

One key question, though, is how much the new bank would pay for distressed assets. Buying assets at too high a price would reward them for taking too much risk. Buying them at too low a price would mean banks would will have less to lend.

Plus, with the government acquiring billions in potentially bad loans, "It would leave the taxpayer fully exposed to any future losses," said Stephen Lewis, chief economist at Monument Securities in London.

American officials are considering other ideas to cope with the credit crisis. The current U.S. rescue program has come under heavy criticism from lawmakers unhappy that the George W. Bush administration provided billions of dollars to banks to shore up their finances but did not impose restrictions to insure they would increase their lending.

Many lawmakers are pushing the incoming Obama administration to devote more money to halting a tidal wave of mortgage foreclosures, and to impose more limits on executive compensation.

Last week, new cracks appeared in the country’s two largest banks. Citigroup Inc. on Friday reported a $8.29 billion loss in the fourth quarter and announced it was splitting itself in two. Bank of America reported a $2.39 billion fourth-quarter loss, hours after ironing out a deal for a fresh $20 billion government lifeline to digest troubled brokerage Merrill Lynch.

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Filed under: economics, legal by TheDoor