2008 United Kingdom bank rescue package

A bank rescue package totalling some £

Pound sterling

The pound sterling , commonly called the pound, is the official currency of the United Kingdom, its Crown Dependencies and the British Overseas Territories of South Georgia and the South Sandwich Islands, British Antarctic Territory and Tristan da Cunha. It is subdivided into 100 pence...

500 billion (approximately $

United States dollar

The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....

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

Stock market

A stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...

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.

Background

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

Emergency Economic Stabilization Act of 2008

The Emergency Economic Stabilization Act of 2008 The Emergency Economic Stabilization Act of 2008 The Emergency Economic Stabilization Act of 2008 (Division A of , commonly referred to as a bailout of the U.S. financial system, is a law enacted in response to the subprime mortgage crisis...

. 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 terms loans through the Bank of England

Bank of England

The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...

'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

Alistair Darling

Alistair Maclean Darling is a Scottish Labour Party politician who has been a Member of Parliament since 1987, currently for Edinburgh South West. He served as the Chancellor of the Exchequer from 2007 to 2010...

, the Chancellor of the Exchequer

Chancellor of the Exchequer

The Chancellor of the Exchequer is the title held by the British Cabinet minister who is responsible for all economic and financial matters. Often simply called the Chancellor, the office-holder controls HM Treasury and plays a role akin to the posts of Minister of Finance or Secretary of the...

, told the House of Commons

British House of Commons

The House of Commons is the lower house of the Parliament of the United Kingdom, which also comprises the Sovereign and the House of Lords . Both Commons and Lords meet in the Palace of Westminster. The Commons is a democratically elected body, consisting of 650 members , who are known as Members...

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

Gordon Brown

James Gordon Brown is a British Labour Party politician who was the Prime Minister of the United Kingdom and Leader of the Labour Party from 2007 until 2010. He previously served as Chancellor of the Exchequer in the Labour Government from 1997 to 2007...

suggested that the government's actions had 'led the way' for other nations to follow whilst Shadow Chancellor

Shadow Chancellor of the Exchequer

The Shadow Chancellor of the Exchequer in the British Parliamentary system is the member of the Shadow Cabinet who is responsible for shadowing the Chancellor of the Exchequer. The title is in the gift of the Leader of the Opposition but is informal. The Shadow Chancellor has no constitutional...

George Osborne

George Gideon Oliver Osborne, MP is a British Conservative politician. He is the Chancellor of the Exchequer of the United Kingdom, a role to which he was appointed in May 2010, and has been the Member of Parliament for Tatton since 2001.Osborne is part of the old Anglo-Irish aristocracy, known in...

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

European Central Bank

The European Central Bank is the institution of the European Union that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt,...

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

Emergency Economic Stabilization Act of 2008

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

Federal government of the United States

The federal government of the United States is the national government of the constitutional republic of fifty states that is the United States of America. The federal government comprises three distinct branches of government: a legislative, an executive and a judiciary. These branches and...

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

Solvency

Solvency, in finance or business, is the degree to which the current assets of an individual or entity exceed the current liabilities of that individual or entity. Solvency can also be described as the ability of a corporation to meet its long-term fixed expenses and to accomplish long-term...

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.

Capital investment

Through the Bank Recapitalisation Fund, the government will buy a combination of ordinary shares and preference shares in affected bank

Bank

A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...

s. 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 dividend

Dividend

Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...

s 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

Nationalization

Nationalisation, also spelled nationalization, is the process of taking an industry or assets into government ownership by a national government or state. Nationalization usually refers to private assets, but may also mean assets owned by lower levels of government, such as municipalities, being...

.

The extent to which different banks participate will vary according to their needs. HSBC

HSBC

HSBC Holdings plc is a global banking and financial services company headquartered in Canary Wharf, London, United Kingdom. it is the world's second-largest banking and financial services group and second-largest public company according to a composite measure by Forbes magazine...

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

Royal Bank of Scotland

The Royal Bank of Scotland Group is a British banking and insurance holding company in which the UK Government holds an 84% stake. This stake is held and managed through UK Financial Investments Limited, whose voting rights are limited to 75% in order for the bank to retain its listing on the...

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

HBOS

HBOS plc is a banking and insurance company in the United Kingdom, a wholly owned subsidiary of the Lloyds Banking Group having been taken over in January 2009...

and Lloyds TSB

Lloyds TSB

Lloyds TSB Bank Plc is a retail bank in the United Kingdom. It was established in 1995 by the merger of Lloyds Bank, established in Birmingham, England in 1765 and traditionally considered one of the Big Four clearing banks, with the TSB Group which traces its origins to 1810...

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.

Participating banks

The plan is open to all UK incorporated banks and all building societies, including the following:

Abbey
Abbey (bank)
Abbey National plc was a UK-based bank and former building society, which latterly traded under the Abbey brand name. It became a wholly owned subsidiary of Grupo Santander of Spain in 2004, and was rebranded as Santander in January 2010, forming Santander UK along with the savings business of the...
Barclays plc
Barclays plc
Barclays PLC is a global banking and financial services company headquartered in London, United Kingdom. As of 2010 it was the world's 10th-largest banking and financial services group and 21st-largest company according to a composite measure by Forbes magazine...
Clydesdale Bank
Clydesdale Bank
Clydesdale Bank is a commercial bank in Scotland, a subsidiary of the National Australia Bank Group. In Scotland, Clydesdale Bank is the third largest clearing bank, although it also retains a branch network in London and the north of England...
HBOS
HBOS
HBOS plc is a banking and insurance company in the United Kingdom, a wholly owned subsidiary of the Lloyds Banking Group having been taken over in January 2009...
HSBC
HSBC Bank (Europe)
HSBC Bank plc is one of the four major clearing banks in the United Kingdom and is a wholly owned subsidiary of HSBC Holdings. The business ranges from the traditional High Street roles of personal finance and commercial banking, to private banking, consumer finance as well as corporate and...

/ HSBC Group
Lloyds TSB
Lloyds TSB
Lloyds TSB Bank Plc is a retail bank in the United Kingdom. It was established in 1995 by the merger of Lloyds Bank, established in Birmingham, England in 1765 and traditionally considered one of the Big Four clearing banks, with the TSB Group which traces its origins to 1810...
Nationwide Building Society
Nationwide Building Society
Nationwide Building Society is a British building society, and is the largest in the world. It has its headquarters in Swindon, England, and maintains significant administration centres in Bournemouth and Northampton...
Royal Bank of Scotland
Royal Bank of Scotland
The Royal Bank of Scotland Group is a British banking and insurance holding company in which the UK Government holds an 84% stake. This stake is held and managed through UK Financial Investments Limited, whose voting rights are limited to 75% in order for the bank to retain its listing on the...

/ Royal Bank of Scotland Group
Standard Chartered Bank
Standard Chartered Bank
Standard Chartered PLC is a multinational financial services company headquartered in London, United Kingdom with operations in more than seventy countries...

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.

Reactions

Paul Krugman

Paul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...

the Nobel Prize

Nobel Prize

The Nobel Prizes are annual international awards bestowed by Scandinavian committees in recognition of cultural and scientific advances. The will of the Swedish chemist Alfred Nobel, the inventor of dynamite, established the prizes in 1895...

winner for Economics stated in his New York Times column that "Mr Brown and Alistair Darling

Alistair Darling

, the Chancellor of the Exchequer

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 US 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.

External links

HM Treasury Press Notice 100/08 Financial support to the banking industry
New Economics Foundation (Oct 2010) - Where did our money go?
BBC News (Oct 2010) - Banks face new funding crisis

The source of this article is wikipedia, the free encyclopedia. The text of this article is licensed under the GFDL.

Background

The rescue plan

Capital investment

Participating banks

Reactions

See also

External links