Alistair Darling yesterday admitted that taxpayers may have to buy toxic assets from Britain’s banks to help kick-start lending, as the chancellor looks to add a 'bad bank' scheme to the government’s plans to insure banks against unexpected losses.

Darling said the bad bank approach may be necessary with 'one or two institutions' in order to remove problematic old loans from banks’ balance sheets rather than simply insuring them, in order to give them the confidence to start lending again.

Darling announced on 19 January that the government favoured a 'back stop' insurance scheme, where the taxpayer charges a fee to banks to guarantee against heavy future losses on certain loans, over a bad bank that would buy the loans outright. At the time, he said the insurance approach was quicker and more straightforward.

Financial Times