By David Milliken and Christina Fincher
LONDON, Feb 3 (Reuters) - Britain has not closed the door on setting up a bad bank to ring-fence toxic assets because the government has to keep all options open to get the banking system working, finance minister Alistair Darling said on Tuesday.
Governments around the world are under pressure to take on financial institutions' bad debt and place it in new vehicles - "bad banks" -- which allows the remaining part of the institution to raise new private capital.
Darling shied away from such a plan when Britain delivered its second bank rescue package last month, opting instead for a scheme which would insure banks against heavy losses on hard-to-trade assets.
At the time it was felt that setting up such an institution would take too long and in any case it would be very difficult to value the toxic assets.
But Darling said that did not mean that the government could not return to the bad bank idea if it was found to be needed. Treasury officials have pointed to the example of the government nationalisation of buy-to-let lender Bradford and Bingley last year as an example of the bad bank model.
"We've certainly not closed the door on a bad bank if that's necessary...I do think we need to look at a range of options," Darling said. "I have always preferred the approach where you have a menu to choose from and you decide what is appropriate."
"Whilst we may not do this immediately I think the split in that way, good and bad may be something that's appropriate."
The United States, under the new Democrat administration of President Barack Obama, is now widely expected to adopt some form of the bad bank approach in the coming weeks, assuming it can decide how to price the toxic assets.
Darling said he had opted for the insurance scheme where banks pay the government a fee to protect them from assets suffering sharp price falls because it was quicker.
"The conclusion we came to was that the quicker thing to do would be to put in place an insurance scheme but what we were always clear about is as things developed ...it could well be that in some cases it will be easier actually to do a good bank/bad bank split," he said.
But some analysts say the insurance scheme might be too messy and the persistent threat of nationalisation will make it hard for banks to raise new capital.
"You don't buy fire insurance on a house that has already burned down," Alan Blinder, former vice chair of the Federal Reserve said at the weekend.
(Additional reporting by Christina Fincher and Keith Weir; Editing by Ron Askew)