The UK Government is to offer more than $A1.2 trillion in loans and guarantees in an effort to support the country’s tottering banking sector.
The package, rumoured for a day or more, is much larger than first thought.
The government is to put up to 250 billion pounds (Well over $A640 billion at current exchange rates) into the banking system in an effort to keep banks lending.
It will also offer a guarantee to banks issuing medium term debt, which could mean a further 250 billion of guarantees for bank borrowings.
But the downside is likely to dividend cuts and the end of big bonuses at the banks for executives and high flyers.
But the scheme failed to halt a slide in many banks’ share prices, with Royal Bank of Scotland down again overnight in early trading after a near-40 per cent slide on Tuesday.
The FTSE 100 plunged 7.8% in an immediate reaction, taking the index to levels last seen in October 2003. It later recovered a touch to end down 4.8%.
HBOS, which is being taken over by Lloyds TSB in a government-driven deal saw its shares recover from the sell off earlier in the week. they ended up 50% at 139p. It had earlier sold off its Australian business to the CBA.
RBS, which had plunged almost 40% on Tuesday, closed off 1.9% at 88.4p having been as much as 10 per cent lower at one stage.
Lloyds TSB slipped 0.2% and Barclays lost 7.1%. HSBC was 4.6%lower at the close and Standard Chartered fell 8%.
Under the plan, announced by the Treasury last night, seven leading banks and the Nationwide Building Society will first up apply for 25 billion ($A64 billion) in permanent capital to raise their Tier One capital ratios, and a similar amount will be made available as a stand-by and for other eligible institutions. The banks have agreed to conclude their recapitalisation by the end of the year.
The banks involved are Abbey, now part of Santander of Spain, Barclays (which bought part or Lehman Brothers last month), HBOS, which is merging with Lloyds TSB, (which in included), the giant HSBC, Royal Bank of Scotland, Standard Chartered (which operates mainly in Asia) as well as Nationwide.
Other UK banks and building societies are being invited to apply for the scheme as well.
Although HSBC is included in the list of eligible institutions, this refers to its UK subsidiary, not its holding company. HSBC said its UK unit would observe the requirements on Tier 1 capital but would do so from its own resources and had “no current plans” to participate in the scheme.
"Following discussions convened by HM Treasury… major UK banks and the largest building society have confirmed their participation in a government-supported recapitalisation scheme," the statement said.
The Treasury said the Bank of England would provide at least 200 billion pounds under its special liquidity scheme – under which banks can swap illiquid loans for risk-free government securities – “until markets stabilise”.
”The Bank of England will take all actions necessary to ensure that the banking system has access to sufficient liquidity,” the Bank said. ”In its provision of short-term liquidity the Bank will extend and widen its facilities in whatever way is necessary to ensure the stability of the system.”
A few hours later, the Bank of England cut its key rate 0.50% to 4.5% as part of a co-ordinated set of cuts by central banks in the US and Europe.
Elsewhere in Europe, Spain set up a bank loan fund. The Bank of Japan lent $US20 billion to its money markets, the Reserve Bank here more than $A1 billion, and also significantly widened the types of collateral it would take for loans to banks and greatly lengthened the period for which it would lend.
Now it will do repurchase deals in self-securitised home loans and commercial paper. This will allow the banks to get liquidity as foreign borrowings roll off and mature, but can’t be replenished.
Between $A60 billion and $100 billion is estimated to be involved in both types of securitised paper.
Hong Kong cut the borrowing rate it charged banks by a full 1% and there were reports China might soon cut its interest rates.
The Federal Reserve took the radical step of lending to companies directly and signalled a new readiness to ease US interest rates.
Spain will spend as much as 50 billion euros ($US96 billion or well over $A112 billion) to buy bank assets. It was the first move by a European nation to copy the US strategy.
The Government announced that it will boost its guarantee for deposits in its banks to 100,000 euros ($A189,000) and set up a 30 billion euro ($A56.7 billion) fund to buy assets from banks and keep credit flowing to the economy.
Prime Minister Jose Luis Rodriguez Zapatero told a news conference the guarantee was double the minimum agreed at that European finance ministers’ meeting in Luxembourg earlier on Tuesday.
Spain’s banks have been better regulated than elsewhere in Europe, have so far been spared the havoc generated by the subprime/CDO disasters that have crippled banks in the US, UK and Germany.
But now the central bank, the Bank of Spain has said for the first time that the country’s banks could be forced into mergers.
Many smaller institutions and savings banks are most exposed to the liquidity drought in financial markets and are suffering the most from Spain’s own great financial disaster, its housing collapse.
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