Government Bailout for Troubled Banking Sector

Multi-billion pound rescue plan intends to help shore up banks and free lending constraints.

Morningstar.co.uk Editors 8 October, 2008 | 9:44AM
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The Government is introducing a multi-billion rescue package to assist some of the biggest UK banks, after Monday and Tuesday saw banking shares fall dramatically on the back of global concerns about the sector. Signed up to participate in the UK scheme is: Abbey, Barclays, HBOS, HSBC Bank plc, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland and Standard Chartered.

These institutions have committed to the Government that they will increase their total Tier 1 capital by on average £25 billion before the end of the year. In exchange, the Government is making £25 billion available to these firms to be drawn on if desired to assist in this process. In addition, the Government is ready to provide an incremental minimum of £25 billion of further support for all eligible insti

tutions, in the form of preference shares, PIBS or, at the request of an eligible institution, as assistance to an ordinary equity fund-raising. The amount to be issued per institution is to be finalised following detailed discussions.

On top of these aids, the Government is to make £250 billion available to underwrite the banks' medium-term debts in order to help prevent any funding gaps. Subject to further discussion with eligible institutions, the proposal envisages the issue of senior unsecured debt instruments of varying terms of up to 36 months. The current expectation is the guarantee would be issued out of a specifically designated Government-backed English incorporated company.

In addition to the Treasury’s plans, the Bank of England (BoE) is making at least £200bn available to UK banks under a Special Liquidity Scheme. Next week the BoE will bring forward its plans for a permanent regime underpinning banking system liquidity, including a Discount Window facility.

The Government has informed the European Commission of these proposals and is actively talking to other countries about extending them.

The plan did not do much to assuage investors in early trading. The FTSE dropped more than 7% in early trading before bouncing back a bit, but remained down more than 5% mid-morning. Among banks, HBOS was the only riser, climbing 26.9%. Barclays was down 10.6%, HSBC had slipped 4.6%, RBS fell 5.9%, Lloyds TSB was down 3.2%, and Standard Chartered was down 12.4%.

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