THE BRITISH government is being pressed to conduct its own fully independent audit of balance sheets before insuring UK banks against so-called toxic assets in an attempt to unblock the flow of credit.

Conservative shadow chancellor George Osborne made the demand yesterday after Alistair Darling, the chancellor, unveiled a fresh package of measures to encourage banks to lend to businesses and individuals, which, some city experts suggest, could expose taxpayers to potential losses of between £20 billion and £40 billion.

Liberal Democrat spokesman Vince Cable quoted that estimate, while suggesting the £100 billion guarantee scheme amounted to bank “nationalisation in all but name” and questioning how it was possible to insure against bad debt if the insurer (the government) didn’t know what the liabilities were.

Mr Darling agreed with Mr Osborne that there would have to be a “proper audit” before the treasury could decide what it was prepared to insure, promising to report back to MPs on the detail once negotiations with the banks have been concluded.

But with Royal Bank of Scotland shares plunging after the bank confirmed it was heading for a record loss, former Conservative leader Iain Duncan Smith also asked how the government could reassure the public, having already acquired a majority share in RBS last December while seeming not to know about the losses it is set to declare.

Mr Darling announced yesterday that the government’s share in RBS could rise from 58 per cent to 70 per cent, while Northern Rock has been given extra time to repay its loans from the government and will no longer be required to reduce its mortgage book rapidly.

In addition to the heavily flagged bank insurance scheme, Mr Darling announced the Bank of England will be allowed to buy up to £50 billion worth of assets in companies across the economy. The chancellor told MPs these would be “high-quality assets”, representing good investments that would eventually be sold to the benefit of the taxpayer.

The proposed insurance scheme would see banks agree with government the amount they expect to lose from a particular debt, 90 per cent of which would then be insured upon payment of a fee.

Before the insurance of assets was agreed, Mr Darling said the banks would have to negotiate legally binding lending responsibility agreements. Both he and Mr Brown insisted the new scheme did not amount to a “blank cheque” for banks that had taken on bad loans.

Under pressure to spell out the scale of taxpayer exposure, Mr Brown told a press conference: “It’s for the treasury to decide after an analysis of the banks, in a published way, what is the insurance we are prepared to take on this and what the cap is going to be.”

But he stressed: “You would be completely misunderstanding the situation if in any way you were suggesting this was a blank cheque. Quite the opposite.”

Mr Cable warned if it wasn’t “very, very carefully structured”, there were potentially “enormous losses on a scheme that hasn’t been properly thought through”.