The UK banks will get an unprecedented £50-billion ($87 billion) government lifeline and emergency loans from the central bank after the freeze in credit markets threatened to bring down the financial system.
The government will offer to buy preference shares from Royal Bank of Scotland Group Plc, Barclays Plc and at least six other banks, and provide about £250 billion of loan guarantees to refinance debt, the Treasury said in a statement today. The Bank of England will make at least £200 billion available. The plan doesn’t specify how much each bank will get.
The emergency action came after the FTSE 350 Banks Index fell almost 20 per cent in the past month. Prime Minister Gordon Brown is following US President George W Bush, who approved a plan last week to spend $700 billion to prop up financial institutions with untested measures as equities plunged around the world.
“The global market has ceased to function,” Brown said today at a press conference in London. “The banking system must be sounder, and that is why we are putting the capital in.”
Brown’s government was forced to act as the economy tumbled toward a recession and shares of the country’s biggest banks lost more than half their value in a week. Edinburgh-based RBS, Britain’s third-largest bank by market value, had its credit rating cut by Standard & Poor’s for the first time in almost a decade on concern that its financial health was deteriorating.
Nationalising Banks: The steps to partially nationalise the industry provide the “building blocks to allow banks to return to their basic function of providing cash and investment,” Chancellor of the Exchequer Alistair Darling said today.
Britain joins the US and many European countries in rushing out bailout measures. Germany, Ireland and Greece have pledged to guarantee savers’ deposits. Iceland has taken over two of the nation’s three biggest banks, and Spain has agreed to spend as much as ¤50 billion ($68 billion) to buy bank assets.
The UK initiative comes after the government took control of Northern Rock Plc and Bradford & Bingley Plc earlier this year and arranged the takeover of Edinburgh-based HBOS Plc, the country’s biggest mortgage lender. Darling and Brown are trying to prevent the financial-services industry, which accounts for about a fifth of London’s economy, from collapsing under the weight of the global credit crunch.
Financial-service companies will cut 12,000 jobs before the end of the year, about 33 per cent more than a year earlier, according to estimates last month from the Confederation of British Industry, the country’s biggest business lobby group.
Brown’s Pledge: The government said today it will make £25 billion immediately available to banks in the form of preference shares and is ready to provide another £25 billion. The amount available to each bank will vary, depending on their dividend payouts and executive pay policies. The plan requires the banks to lend to small businesses and home owners, the government said.
The rescue may break Brown’s pledge to keep debt below 40 per cent of the country’s gross domestic product. The budget deficit climbed to the highest since 1993 in August, with debt amounting to 43 per cent of GDP when the liabilities of Northern Rock are factored in. The Treasury probably will provide details later today on how it will fund the plan.
“These measures are better than blanket guarantees, which don’t change the behavior of banks,” said Peter Hahn, a fellow at the Cass Business School in London and former managing director of Citigroup Inc. “The taxpayer has direct exposure and direct control on the banks, which is a good thing.”
