08 Oct 2008, David Benyon, Operational Risk & Regulation
LONDON – The UK has launched a £500 billion bail-out plan to maintain financial stability. Under the scheme, £50 billion of government funds will be used to prop up banks’ capital. In total, the UK Treasury and the Bank of England will together provide £500 billion ($873 billion) in funds, government guarantees and liquidity loans to UK banks.
Governor of the Bank of England Mervyn King says: “A major recapitalisation of the UK banking system of at least £50 billion is a necessary condition for regenerating confidence in the financial system. The recapitalisation, further liquidity support from the Bank of England, and the new guarantee scheme amount to a significant step forward in resolving the present crisis.”
The Treasury says £25 billion will be made available to eight core UK institutions – Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide building society, RBS and Standard Chartered – in exchange for an assurance they will increase their capital by the same figure by the year’s end. A further £25 billion is available for other eligible UK institutions. The £50 billion in funding will be provided for priority shares, representing a part-nationalisation in the funding of UK banks.
In addition, the Bank of England will make at least £200 billion available to banks under its Special Liquidity Scheme, providing three-month loan auctions of sterling, and a new provision for one-week loans in US dollars. The liquidity loans will be guaranteed by the Treasury. Next week, the Bank of England will bring forward its plans for a permanent regime underpinning systemic liquidity, including a discount window facility.
A further £250 billion will be made available by the government to increase medium-term funding to raise banks’ Tier I capital. Government guarantees of debt issuance will be issued, with provision for the use of sterling, euros or US dollars. The Treasury says is expects a specially designated government-backed company to be set up to issue the guarantees. The £250 billion figure is approximate, dependant upon capital levels and lending volumes.
Share prices today among the London Stock Exchange’s FTSE100 initially fell sharply – RBS down by 10% alone – but then rose steadily by mid-morning. Markets were down overall across the UK and Asian markets, ahead of the US opening today.