2008 United Kingdom bank rescue package
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A bank rescue package totalling some £500 billion (approximately $850 billion) was announced by the British government on 8 October 2008, as a response to the ongoing global 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.
The announcement occurred less than 48 hours after Britain's leading share index, the FTSE100, recorded its largest single-day points fall since 1987. 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 term 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. 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.
Alistair 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". 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.
Also on the 8 October 2008 there was a strategic and co-ordinated global effort by seven central banks to calm the current financial crisis, by cutting interest rates by 0.5%. The banks were all members of the OECD and included The Bank of England, The European Central Bank and the U.S Federal reserve along with central banks in China, Switzerland, Canada and Sweden. In a reaction to the move, European stock exchanges began to recover from the losses they had made after trading had opened. The decision to make the cut came after exchanges in the Far East closed on a day of heavy losses.
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 UK Government will see them purchasing shares in the banks (which in the future could see a return being made to the taxpayer), whereas the American program is primarily devoted to the U.S. 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 The U.S. 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.
Through the Bank Recapitalisation Fund, the government will buy a combination of ordinary shares and preference shares in affected banks. The amount and proportion of the stake that will be taken in any one bank is to be negotiated with the individual bank. 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.
The extent to which different banks participate will vary according to their needs. HSBC Group issued a statement announcing it was injecting £750 m 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". Standard Chartered also declared its support for the scheme but its intention not to participate in the capital injection element. Barclays intends to raise £6.5 billion from private investors, and will cancel its final dividend for the year for a net saving of £2 billion.
The Royal Bank of Scotland Group will raise £20 billion from the Bank Recapitalisation Fund, with £5 billion in preference shares and a further £15 billion being issued as ordinary shares. HBOS and Lloyds TSB will together raise £17 billion, £8.5 billion in preference shares and a further £8.5 billion issue of ordinary shares. The Fund will purchase the preference shares outright, for a total £13.5 billion investment, and will underwrite the issues of ordinary shares; should they not be taken up by private investors, the Fund will undertake to purchase them. If none of the new stock is taken up, this would give the Government an overall holding of 60% of the Royal Bank of Scotland, with 40% of the merged HBOS-Lloyds, held as a mixture of preference and ordinary stock.
The plan is open to all UK incorporated banks and all building societies, including the following:
- Barclays plc
- Clydesdale Bank
- HSBC / HSBC Group
- Lloyds TSB
- Nationwide Building Society
- Royal Bank of Scotland / Royal Bank of Scotland Group
- Standard Chartered Bank
However, of these, Abbey, Barclays, Clydesdale, HSBC, Nationwide, and Standard Chartered have chosen not to receive any government money, leaving Lloyds and RBS as the only major recipients.
Paul Krugman the Nobel Prize winner for Economics stated in his New York Times column that "Mr Brown and Alistair Darling, the Chancellor of the Exchequer have defined the character of the worldwide rescue effort, with other wealthy nations playing catch-up." He also stated that "Luckily for the world economy,... Gordon Brown and his officials are making sense,... And they may have shown us the way through this crisis."
The British banking bail-out example was closely followed by the rest of Europe, as well as the U.S Government, who on the 14 October 2008 announced a $250bn (£143bn) plan to purchase stakes in a wide variety of banks in an effort to restore confidence in the sector. The money came from the $700bn bail-out package approved by U.S. lawmakers earlier that month.
A wave of international action to address the financial crisis had at last an effect on stock markets around the world. Although shares in the affected banks fell, the Dow Jones went up by more than 900 points, or 11.1 per cent, while London shares also bounced back, with the FTSE100 Index closing more than 8 per cent higher on the 13 October 2008.
- Government intervention during the subprime mortgage crisis
- 2009 United Kingdom bank rescue package
- UK Financial Investments Limited
- List of banks in the United Kingdom
- Hypo Group Alpe Adria
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