In return for government funding, the three banks have committed to continue lending to homeowners and small businesses and support schemes to help people struggling with mortgage repayments to stay in their homes. The availability and marketing of loans will be at 2007 levels, the government said.
The banks have also made commitments on the remuneration of senior executives. As part of this, the government said it expects no cash bonuses to be paid to board members this year. In the future, bonuses will be linked to “long-term value creation, taking account of risk”.
In addition, the government will have the right to agree with boards the appointment of new independent non-executive directors, and will have a say in dividend policy.
As part of the rescue package unveiled on October 8, the UK government said it will make up to £50 billion available to troubled financial institutions, in return for preference shares or permanent interest bearing shares in those institutions. It also stated it would offer around £250 billion in government guarantees on short- and medium-term debt issued by those institutions that have raised Tier 1 capital to “appropriate” levels.
Eight financial institutions (Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide, Royal Bank of Scotland and Standard Chartered) confirmed their participation in the scheme, in which they committed to increase their total Tier 1 capital by £25 billion – although only RBS, HBOS and Lloyds TSB have so far asked for direct government funding. The capital injection into HBOS and Lloyds TBS will only occur once the two institutions have merged.
Following the capital injections, the Tier 1 ratio of the banks should be above 9%, the government said.
The UK government said it would create a new arms-length body to manage its shareholdings and to “effectively realise value to the taxpayer”. It also confirmed it was “not a permanent investor in UK banks”, and that its intention is to “dispose of all the investments it is making as part of this scheme in an orderly way” over time.
The government is expected to increase debt issuance to pay for the capital injection, and a revised debt remit will be announced by the Debt Management Office tomorrow.
Meanwhile, Barclays declared this morning it would issue £3 billion in preference shares by December 31, 2008, as part of the commitment made by UK banks to increase Tier 1 capital by £25 billion by year end. It will also issue £0.6 billion in new ordinary shares to finance its acquisition of Lehman Brothers’ North America investment banking business, as well as a further £3 billion as soon as possible after the announcement of full-year 2008 results.
Balance sheet management and operational efficiencies are expected to release a further £1.5 billion in equity resources. The bank also confirmed it would not pay a final dividend in 2008, which would have amounted to around £2 billion.
The UK stock market was generally positive this morning, with the FTSE 100 index trading at 4,171.63 as of 0930 BST, a rise of 6.09%.
However, trading on bank stocks was mixed. Barclays was at 235.75 pence as 0918 BST, a rise of 13.61%, while Lloyds TSB was at 209.25 pence, up 10.48%. Shares on RBS were down 4.6% to 69.4 pence, while HBOS was trading at 101 pence as of 0918 BST, a drop of 18.68% from Friday’s close.
See also: UK government unveils £50 billion bank recapitalisation plan
Barclays, however, declared it would not tap government funding, instead raising in excess of £6.4 billion of Tier 1 capital through investors.