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Rescue plan for UK banks unveiled Rescue plan for UK banks unveiled
(9 minutes later)
The UK government has announced a package of measures aimed at rescuing the banking system which could add up to £500bn ($880bn). The UK government has announced a package of measures aimed at rescuing the banking system that could add up to £500bn ($880bn).
It will initially make extra capital available to eight of the UK's largest banks and building societies in return for preference shares in them.It will initially make extra capital available to eight of the UK's largest banks and building societies in return for preference shares in them.
It is "designed to put the British banking system on a sounder footing", said Prime Minister Gordon Brown.It is "designed to put the British banking system on a sounder footing", said Prime Minister Gordon Brown.
But the FTSE 100 in London fell 4% after the measures were unveiled.But the FTSE 100 in London fell 4% after the measures were unveiled.
See chart of rescue planSee chart of rescue plan
In early afternoon trade, HBOS shares were up 43% and Royal Bank of Scotland was 11% higher. However, shares in Lloyds TSB were down 8.7% and Barclays was 8% lower. The falls on the FTSE 100 also came despite co-ordinated interest rate cuts from the Bank of England, European Central Bank and Federal Reserve.
In afternoon trade, HBOS shares were up 40% and Royal Bank of Scotland was 9% higher, but shares in Lloyds TSB were down 7% and Barclays was 12% lower.
Taking taxpayers' money will not be a licence to trade as normal Robert Peston, BBC business editor Read Robert Peston's blogTreasury statement in fullWorld in turmoilTaking taxpayers' money will not be a licence to trade as normal Robert Peston, BBC business editor Read Robert Peston's blogTreasury statement in fullWorld in turmoil
The key points of the plan are:
  • Banks will have to increase their capital by at least £25bn and can borrow from the government to do so.
  • An additional £25bn in extra capital will be available in exchange for preference shares.
  • £200bn will be available in short-term loans from the Bank of England, up from £100bn.
  • Up to £250bn in loan guarantees will be available at commercial rates to encourage banks to lend to each other.
  • To participate in the scheme banks will have to sign up to an FSA agreement on executive pay and dividends.
The key points of the plan are:
  • Banks will have to increase their capital by at least £25bn and can borrow from the government to do so.
  • An additional £25bn in extra capital will be available in exchange for preference shares.
  • £200bn will be available in short-term loans from the Bank of England, up from £100bn.
  • Up to £250bn in loan guarantees will be available at commercial rates to encourage banks to lend to each other.
  • To participate in the scheme banks will have to sign up to an FSA agreement on executive pay and dividends.
Falling sharesFalling shares
BBC business editor Robert Peston said it was understandable that shares in some of the UK banks had fallen following news of the government's package.BBC business editor Robert Peston said it was understandable that shares in some of the UK banks had fallen following news of the government's package.
He said that the huge amount of new capital the banks would have to take on would be expensive. However, the message of the rescue plan was that they needed the extra funds.He said that the huge amount of new capital the banks would have to take on would be expensive. However, the message of the rescue plan was that they needed the extra funds.
"So it may be good news that the Treasury is prepared to shore up their balance sheets, but it's pretty bad news that there's such a big hole to fill," he said."So it may be good news that the Treasury is prepared to shore up their balance sheets, but it's pretty bad news that there's such a big hole to fill," he said.
He argued that HBOS shares had risen strongly because the rescue plan had brought it back from the brink to a greater extent than its peers.He argued that HBOS shares had risen strongly because the rescue plan had brought it back from the brink to a greater extent than its peers.
Special companySpecial company
BANKS SIGNED UP AbbeyBarclaysHBOSHSBCLloyds TSBNationwide Building SocietyRoyal Bank of ScotlandStandard Chartered See banking sector sharesParties support planLatest at a glanceReaction to the planBANKS SIGNED UP AbbeyBarclaysHBOSHSBCLloyds TSBNationwide Building SocietyRoyal Bank of ScotlandStandard Chartered See banking sector sharesParties support planLatest at a glanceReaction to the plan
Much of the current crisis has been caused by the banks' unwillingness to lend to each other, so the government hopes that if those loans can be guaranteed then lending will resume.Much of the current crisis has been caused by the banks' unwillingness to lend to each other, so the government hopes that if those loans can be guaranteed then lending will resume.
"This is beginning a process of un-bunging a big problem where banks won't lend to each other for long periods," Mr Darling said."This is beginning a process of un-bunging a big problem where banks won't lend to each other for long periods," Mr Darling said.
The lenders that have confirmed their participation in aspects of the scheme are Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland and Standard Chartered.The lenders that have confirmed their participation in aspects of the scheme are Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland and Standard Chartered.
The Treasury said that other banks and building societies would be able to apply for inclusion in the plan.The Treasury said that other banks and building societies would be able to apply for inclusion in the plan.
Possible profitPossible profit
Protecting taxpayers money means the millions of people who own shares in the banks will lose out in the future, as the government has first call on any future profits Declan Curry, Presenter, BBC 2 Working Lunch Working Lunch special: How will the crisis affect you?, on BBC 2, 1330 UK time
Preference shares pay a fixed rate of interest instead of a dividend, which has to be paid before other shareholders receive anything, but they do not carry voting rights.Preference shares pay a fixed rate of interest instead of a dividend, which has to be paid before other shareholders receive anything, but they do not carry voting rights.
Taxpayers may even end up making a profit from the shares, but that is by no means guaranteed.Taxpayers may even end up making a profit from the shares, but that is by no means guaranteed.
Robert Peston said there would be strings attached for banks that take the government money.Robert Peston said there would be strings attached for banks that take the government money.
"Taking taxpayers' money will not be a licence to trade as normal," he said."Taking taxpayers' money will not be a licence to trade as normal," he said.
Negotiations will take place with each participating institution that will require them to extend normal credit lines to homeowners and small businesses, in addition to rules on executive pay and dividends to other shareholders.Negotiations will take place with each participating institution that will require them to extend normal credit lines to homeowners and small businesses, in addition to rules on executive pay and dividends to other shareholders.
'Stop the panic''Stop the panic'
It is hoped that the deal will get the money markets going again and assure the future of the banking system.It is hoped that the deal will get the money markets going again and assure the future of the banking system.
"They've got additional capital now if they want it, they've got an unlimited source of liquidity," said Terry Smith, chief executive of the money brokers, Tullett Prebon."They've got additional capital now if they want it, they've got an unlimited source of liquidity," said Terry Smith, chief executive of the money brokers, Tullett Prebon.
"That certainly should stop the panic in terms of people wondering whether or not the banks are safe.""That certainly should stop the panic in terms of people wondering whether or not the banks are safe."
The deal has also been welcomed by the banks.The deal has also been welcomed by the banks.
"The government's announcement represents a very real and serious intention on the part of the authorities, following consultation with the banking industry, to bring stability and certainty to the UK banking system," HBOS said in a statement."The government's announcement represents a very real and serious intention on the part of the authorities, following consultation with the banking industry, to bring stability and certainty to the UK banking system," HBOS said in a statement.
Barclays, Lloyds TSB and RBS also issued statements welcoming it.Barclays, Lloyds TSB and RBS also issued statements welcoming it.
HSBC, Nationwide and Standard Chartered also welcomed the plan but said they did not intend to take on any new capital at the moment.HSBC, Nationwide and Standard Chartered also welcomed the plan but said they did not intend to take on any new capital at the moment.
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