Gordon Brown and Alistair Darling set out a radical £500 billion package today to restore confidence in the UK banking sector and break the crippling logjam in credit markets.
The three-part package includes committing up to £50 billion of taxpayer funds for a partial nationalisation of stricken banks, met from increased public borrowing and with political strings attached that would include reining in executive pay.
In addition, the Bank of England will pump at least £200 billion into the money markets under its existing Special Liquidity Scheme. The Government is also making a further £250 billion available for banks over the next three years to guarantee medium-term debt to help restore confidence and get banks lending to each other again.
The deal was hammered out in talks with banking chiefs that dragged on into the early hours. At a joint press conference in Downing Street, both the Prime Minister and Chancellor were keen to draw a distinction between their rescue plan and the $700 billion US bailout involving the purchase of “toxic” assets.
“All these are investments being made by the Government, which will earn a proper return for the taxpayer,” Mr Brown said.
“Remember, this is not the American plan. The American plan is to buy up the state assets by state funds. The £50 billion is to buy shares and therefore we will have a stake in the banks and we will get the upside in the appropriate cases from what we have done.”
“Look at it another way,” Mr Darling added. “If you didn’t do anything, there would be a very significant cost to all of us as taxpayers.”
A key element of the deal is a government-supported recapitalisation under which eight major lenders have agreed between them to raise their Tier 1 capital – the main measure by which regulators assess a bank’s strength – by £25 billion between them.
The Treasury is offering to fund that recapitalisation, meaning a partial nationalisation and a dilution of existing stockholdings, as well as offering a further £25 billion to buy preference shares or PIBs – permanent interest-bearing shares.
But not all of the banks involved will take taxpayer cash to strengthen their Tier 1 capital. Both HSBC, the country’s biggest banking group, and Standard Chartered, said today that they would not need public funds and only Royal Bank of Scotland said that it would do so.
The other lenders involved are Lloyds TSB, Barclays, Nationwide, Abbey (which is owned by the Spanish bank Santander) and HBOS (which is to be taken over by Lloyds TSB).
Describing the challenge facing policymakers, Mr Brown said that the global financial market had “ceased to function, putting in danger the necessary flow of money to businesses and families on which all of us depend in our daily lives”. Accordingly, he added, officials in the Treasury, the Bank of England and the Financial Services Authority had been working for weeks on a rescue plan.
“The programme is designed to restore confidence and trust in the financial system and, more than that, to put the British banking system on a sounder footing so as to build strength so that it can support jobs and prosperity right across the economy,” he said.
But both he and Mr Darling have been blamed for failing to act more quickly in the face of this week’s market meltdown, in which some major British banks have seen their share prices more than halved as the City waited for the details of a rescue plan.
The FTSE 100 Index was in fresh turmoil today as investors digested the bank rescue package and followed the lead from Asia. It opened 2 per cent lower but went on to fall nearly 7 per cent in the first hour of business, before climbing back up to stand around 180 points, or nearly 4 per cent down.
Royal Bank of Scotland, whose shares dived nearly 40 per cent yesterday, slumped again in early trading but then began to soar: by 11.50pm it was up 55p, opr almost 60 per cent, at 149p. RBS was up 28p, or 31 per cent, up at 118p, while the other major banking stocks were more narrowly mixed.
David Kern, economic adviser at the British Chambers of Commerce, said he welcomed the “radical measures” taken by the Government to restore stability but called for an interest rate cut and lower business taxes.
“Given the erratic mood of volatility in the financial market there remains clearly a risk of renewed speculative attack,” he added. “The current financial turmoil must not be allowed to damage the real economy. The vital flow of finance to businesses and consumers must be maintained at all costs.”
In Downing Street, Mr Brown also announced that the UK had put forward plans this morning for a pan-European funding plan and was also in discussions with the leaders of both industrialised and major emerging economies.
He added: “This comprehensive set of decisions on stability, on restructuring and on financing are the necessary building blocks to allow banks to return to their basic function of providing cash and investment for families and businesses and thus help the economy move forward.
“These decisions are the best way of providing long-term security for depositors and savers.”
Asked why he would not offer a concrete guarantee to all savers that their deposits were safe, Mr Brown stressed that no one had yet lost out in any of the banks which had hit difficulty, such as Northern Rock and Bradford & Bingley.
The same support was also being given to those with money in troubled Icelandic bank Icesave. The Treasury confirmed today that British savers’ money would be guaranteed by the Government, even above the current £50,000 limit.
October 8, 2008
Source: Times Online