2008 United Kingdom bank rescue package

A bank rescue package totalling some £500 billion (US$860 billion) was announced by the British Government on 8 October 2008, as a response to the ongoing financial crisis. After two unsteady weeks at the end of September, the first week of October had seen major falls in the stock market and severe worries about the stability of British banks. The plan aimed to restore market confidence and help stabilise the British banking system, and provided for a range of short-term loans and guarantees of interbank lending, as well as up to £50 billion of state investment in the banks themselves.

Background

The announcement occurred less than 48 hours after Britain's leading share index, the FTSE100, recorded its largest single-day points fall since 1987. [ cite web |title=Stocks slide despite reassurances |publisher=BBC News |date=2008-10-06 |url=http://news.bbc.co.uk/1/hi/business/7655288.stm |accessdate=2008-10-08 ] A similar bailout package had been passed in the United States the previous week, as the Emergency Economic Stabilization Act of 2008. Details of the rescue package were worked on overnight and were finalised at 05:00.

The rescue plan

The plan provides for several sources of funding to be made available, to an aggregate total of £500 billion in loans and guarantees. Most simply, £200 billion will be made available for short terms loans through the Bank of England's Special Liquidity Scheme. Secondly, the Government will support British banks in their plan to increase their market capitalisation through the newly formed Bank Recapitalisation Fund, by £25 billion in the first instance with a further £25 billion to be called upon if needed. Thirdly, the Government will temporarily underwrite any eligible lending between British banks, giving a loan guarantee of around £250 billion.cite web|url=http://www.hm-treasury.gov.uk/statement_chx_081008.htm|title= Statement by the Chancellor on financial stability|last=Darling|first=Alastair|date=8 October 2008|publisher=HM treasury|language=English|accessdate=2008-10-09] However, only £400 billion of this is 'fresh money', as there is already in place a system for short term loans to the value of £100 billion. cite web |title=Central banks cut interest rates |publisher=BBC News |date=2008-10-08 |url=http://news.bbc.co.uk/1/hi/business/7658277.stm |accessdate=2008-10-08 ]

Through the Bank Recapitalisation Fund, the government will buy preference shares in the banks; these shares will take priority in the event of a liquidation, and will pay a dividend but hold no voting rights. The amount and proportion of the stake that will be taken in any one bank has yet to be determined. Banks that take the rescue packages will have restrictions on executive pay and dividends to existing shareholders, as well as a mandate to offer reasonable credit to homeowners and small businesses. The long-term government plan is to offset the cost of this program by receiving dividends from these shares, and in the long run, to sell the shares after a market recovery. This plan may potentially extend to underwriting new issues of shares by any participating bank. The plan has been characterised as, in effect, partial nationalisation. [cite news
url=http://www.guardian.co.uk/business/2008/oct/08/creditcrunch.banking
title=Government to spend £50bn to part-nationalise UK's banks
publisher=The Guardian
date=2008-10-08
accessdate=2008-10-08
first=Graeme
last=Wearden
coauthors=
]

Alastair Darling, the Chancellor of the Exchequer, told the House of Commons in a statement on 8 October 2008 that the proposals were "designed to restore confidence in the banking system", and that the funding would "put the banks on a stronger footing". [ cite web |title=Hansard |publisher=Hansard |date=2008-10-06 |url=http://www.publications.parliament.uk/pa/cm200708/cmhansrd/cm081008/debtext/81008-0004.htm#08100877000003 |accessdate=2008-10-10] . Prime Minister Gordon Brown suggested that the government's actions had 'led the way' for other nations to follow whilst Shadow Chancellor George Osborne stated that "This is the final chapter of the age of irresponsibility and it’s absolutely extraordinary that a government has been driven by events to today's announcement"; in addition to offering opposition support for the plan. [cite web |last=Barker |first=Alex |title=Brown says UK leads world with rescue |publisher=Financial Times |date=2008-10-08 |url=http://www.ft.com/cms/s/0/a3fb9670-951c-11dd-aedd-000077b07658.html?nclick_check=1 |accessdate=2008-10-08 ]

The British rescue plan differs from the $700bn US bailout formally entitled the Troubled Asset Relief Program (TARP), in that the £50bn being invested by the U.K. Government will see them purchasing 'preference shares' from the banks (which in the future could see a return being made to the taxpayer), whereas the American program is primarily devoted to the US Government purchasing the mortgage backed securities of the American banks which are not able to be sold in the secondary mortgage securities market. The U.S. program does require the U.S. government to take an equity interest in financial organisations selling their securities into the TARP [cite web |title=Q&A: How will the UK bailout work? |publisher=CNN |date=2008-10-08 |url=http://edition.cnn.com/2008/BUSINESS/10/08/uk.bailout.questions/index.html |accessdate=2008-10-08 ] The US programme therefore does not address the fundamental solvency problem faced by the banking sector, but rather is aimed at tackling the immediate funding shortfall; the UK package tackles both solvency, through the £50bn recapitalisation plan, and funding, through the government guarantee for banks' debt issuances and the expansion of the Bank of England's Special Liquidity Scheme.

Participating banks

The plan is open to all UK incorporated banks and all building societies, including the following: :

*Abbey
*Barclays plc
*HBOS
*HSBC
*Lloyds TSB
*Nationwide Building Society (a building society)
*Royal Bank of Scotland
*Standard Chartered Bank

The extent to which different banks participate will vary according to their needs. HSBC Group issued a statement announcing it was injecting £750m of capital into the UK bank and therefore has "no plans to utilise the UK government's recapitalisation initiative ... [as] the Group remains one of the most strongly capitalised and liquid banks in the world". [ [http://www.hsbc.com/1/2/newsroom/news/news-archive-2008/capital-base-of-hsbc-uk-strengthened Capital base of HSBC UK strengthened] , 9th October 2008] . Standard Chartered also declared its support for the scheme but its intention not to participate in the capital injection element [ [http://investors.standardchartered.com/releasedetail.cfm?releaseid=339065 Standard Chartered welcomes UK Government announcement] 8th October 2008] .

See also

* Government intervention due to subprime crisis

References

External links

* [http://www.hm-treasury.gov.uk/press_100_08.htm HM Treasury Press Notice 100/08] Financial support to the banking industry


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