Britain’s five leading high street banks have as much as £95.3 billion ($175 billion) of distressed assets on their books that may qualify for the American bailout scheme.

If the British banks tap the rescue fund being set up by the US Treasury and the Federal Reserve to the maximum, they could secure one quarter of the $700 billion being made available. Under the terms of an outline agreement that appeared to have been reached by US policymakers last night, Britain’s lenders will be able to use the facility.

However, the prospect that the US Treasury could pay for UK banks’ bad assets is likely to infuriate some American politicians and taxpayers, who would foot the bill. As Congress edged closer to agreeing a plan for the central bank to take on lenders’ toxic assets, HSBC appeared to be the UK-based bank best placed to benefit.

Combined, the five British lenders hold securities worth $175 billion, which they could transfer to a federally backed Treasury fund. Under the proposed terms of the rescue package, non-US financial institutions must have significant operations in America to qualify.

According to analysts’ estimates, and the banks’ own recent filings, HSBC has as much as £45 billion in structured mortgage debt and other soured assets sitting on its balance sheet that it might look to exchange with the Fed under the plan. Next are Barclays, with £17.4 billion; Royal Bank of Scotland, with £16.2 billion; and HBOS, the UK’s largest mortgage bank, with £13.3 billion, analysts said yesterday. Lloyds TSB, which agreed to buy HBOS for £12.2 billion last week, follows some way behind in its exposure to the troubled mortgage securities, with assets of about £3.4 billion.

The estimates are based on banks’ balance-sheet exposure to sub-prime and the better alt-A mortgage securities, as well as leveraged finance, commercial mortgage-backed securities, collateralised debt obligations and monoline insurance as of June 30.

Henry Paulson, the US Treasury Secretary, and Ben Bernanke, the Chairman of the Fed, tabled the proposal, known as the Troubled Asset Relief Programme (Tarp), last week in an effort to stabilise the financial system and free up capital markets.

Alex Potter, a Collins Stewart banks analyst, said: “HSBC, RBS and Barclays would be the clear main beneficiaries if the facility is approved, they are allowed access to it and if they chose to place some of their securities there. If they have a substantial enough presence in the US — HBOS has a limited treasury function, for example — they should be eligible. The question then will be: ‘What are the qualifying instruments?’.”

A high street bank executive questioned how beneficial Tarp would be to UK lenders. “The key question if it was used would be: ‘What kind of haircut do you have to take?’,” the banker said. “If you’ve got $100 million of mortgage-backed securities that have been marked down twice and are on the books at 80 cents in the dollar, it’s unlikely that the Fed is going to be offering a better price for them. So you’d hold on.”

Stresses in the money markets remained severe. The cost to banks of borrowing from one another for three months in dollars, euros and sterling rose again. Elevated money market rates are increasing the cost of bank borrowing and feeding through to higher mortgage rates. HSBC and Woolwich increased rates on some mortgages by up to 0.35 percentage points.

— While Republicans and Democrats pledged to try to vote through the bailout within days, it became clear that Mr Paulson had been forced to back down on key demands. Banks that benefit from the bailout would have a cap imposed on golden parachute pay deals, but it is not clear if the Treasury would have the right to veto a pay deal for an executive working for a bank outside the US. Washington would also have the right to take equity stakes in those financial institutions. The issue of whether to allow bankruptcy judges to force banks to cut mortgage rates for troubled borrowers was unresolved.

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