Great Britain announces a vast support plan for its financial sector providing for a bank recapitalization program of up to 50 billion pounds (64.3 billion euros) and a liquidity injection from the Bank of England of at least 200 billion pounds.
Following particularly heated discussions overnight from Tuesday to Wednesday following the dramatic fall in the shares of some of Britain’s biggest banks, Finance Minister Alistair Darling presented measures which he says should give boost lending activity and restore confidence.
The Darling plan plans to increase banks’ capital in the form of preferential securities or similar instruments and to make at least 200 billion pounds (259 billion euros) of liquidity available to them under a “Special Liquidity Scheme” in the aim of unblocking the interbank market.
Seven UK banks, Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Royal Bank of Scotland, Standard Chartered and Nationwide Building Society, the country’s leading building society, will benefit from the government’s recapitalization programme.
They have undertaken to increase their overall Tier 1 capital by 25 billion pounds (32.4 billion euros) in total.
“To facilitate this process, the government is making available to these establishments if they wish it 25 billion pounds (…) in the form of preferential securities or PIBS (securities bearing permanent interest)”, explains the Treasury in a communicated.
“In addition, the government stands ready to provide additional and regular support of £25 billion for all eligible establishments,” it adds.
THE FEAR EFFECT
In return, London will require banks to meet certain terms and conditions, including committing to supporting SMEs and first-time buyers and taking care of executive compensation.
In order to encourage the banks to lend to each other again, the Bank of England is setting up a Special Liquidity Scheme of at least 200 billion pounds and it will practice auctions in sterling at three months and in dollars at one week on a period of three months, accepting a wide variety of collateral, until the markets stabilize.
The State will also issue guarantees on short and medium debt – 36 months at most, in sterling, dollars or euros – to banks that undertake to raise their first category capital.
“The government estimates that collateral demands will be in the region of £250bn; he will monitor this while remaining attentive to capital positions and loan volumes”.
Asked by BBC radio, Darling assured that the taxpayers’ money mobilized for this program would be recovered after three years.
“We’re talking about £200 billion,” he said. “This is what is effectively lent to the banking system and we will get it back, with interest (…) at the end of a three-year period,” he said.
Darling admitted that the government cannot force the banks to trust each other and lend to each other freely again, but he said: What can be done is to reduce the fear effect; this is what prevents banks from lending to each other over the longer term”.
A SIGNIFICANT STEP FORWARD
For the governor of the Bank of England Mervyn King, the device of assistance to the banks is a crucial stage of the resolution of the crisis.
“A large-scale recapitalization of at least £50 million is a necessary condition to restore confidence in the financial system,” he said in a statement.
“The recapitalisation, the additional liquidity support from the Bank of England and the new guarantee scheme represent a significant step forward in resolving the current crisis”.
The BoE also intends to relaunch a project to overhaul the rules governing bank liquidity, affecting in particular the discount window, a project which had been shelved since September due to the crisis.
The first reactions from British banks are rather positive, even though HSBC has indicated that it intends to dispense with recapitalization aid while respecting the new deal in terms of “hard” equity.
UK bank stocks initially reacted in mixed fashion but for the most part are now trending lower, except for HBOS which soared 24%.
HSBC lost more than 5%, Barclays 12.5%, Standard Chartered 12%. Royal Bank of Scotland and Lloyds TSB, which initially reacted sharply higher, lost 3.00% and 2.7% respectively.