The Government is seriously considering creating a 'bad bank' to house the billions of pounds of toxic assets owned by Britain’s major lenders.

The Treasury is understood to have asked the investment bank Credit Suisse to draw up a detailed plan for the logistics of creating a bad bank, in a bid to restore confidence in the sector and to kick-start lending to consumers and businesses.

A bad bank has been floated as a potential measure to help solve the financial crisis by analysts but it has risen up the political agenda in recent weeks as banks’ balance sheets look increasingly dire.

According to banking sources, the Government is considering two models for a bad bank. One would be to buy toxic assets from lenders and transfer them into a bad bank. The problem with this option is that if banks have not written down the value of their assets aggressively enough, they may have to suddenly crystalise new losses when assets are sold to the Government.

Daily Telegraph