UK makes it cheaper to guarantee bank debt

LONDON, Dec 15 (Reuters) - Britain will make it cheaper for banks to get their debt guaranteed, the UK Treasury said on Monday as part of measures to encourage banks to lend more to firms and households affected by the global credit crunch.

Banks have found it increasingly costly to raise money from financial markets to lend on to smaller borrowers, and in October Britain said it would guarantee new debt issued by banks with a maturity of up to three years.

Institutions using the British government guarantee had to pay a rate half a percentage point higher than their average credit default swap spread rate -- the market's approximate charge for insuring a bank's debt.

In Monday's announcement, the Treasury said it was switching the period it used to calculate the spread rate to an earlier July 2007-July 2008.

"The Government is adjusting the formula that determines the fees paid by participating institutions for use of the Government guarantees," the Treasury said in a statement.

"This will lead to those institutions paying a lower -- but still commercial -- fee for use of the Scheme. This in turn will support their ability to continue to extend credit to the economy."

Britain said the maximum term of instruments guaranteed under the scheme would stay at three years but said rollovers may be allowed to an extended scheme length, up to April 2014.

Debt issued in yen, Australian dollars, Canadian dollars and Swiss frances will also now be eligible, alongside the original accepted currencies of sterling, U.S. dollars and euros.

(Reporting by Matt Falloon and David Milliken)