2008 United Kingdom bank rescue package

Alistair Darling, Chancellor of the Exchequer in 2008.

A bank rescue package totalling some £500 billion (approximately $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 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.

Subsequently, broadly similar measures were introduced by the United States and the European Union in response to the financial crisis.^[1][2][3]

Background

The announcement came less than 48 hours after Britain's leading share index, the FTSE100, recorded its largest single-day points fall since 1987.^[4]

The rescue plan

The plan provided for several sources of funding to be made available, to an aggregate total of £500 billion in loans and guarantees. Most simply, £200 billion was made available for short term loans through the Bank of England's Special Liquidity Scheme. Secondly, the Government supported 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 temporarily underwrote any eligible lending between British banks, giving a loan guarantee of around £250 billion.^[5] However, only £400 billion of this was 'fresh money', as there was already in place a system for short term loans to the value of £100 billion.^[6]

Alistair Darling, the Chancellor of the Exchequer, told the House of Commons 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".^[7] Prime Minister Gordon Brown suggested that the government's actions had 'led the way' for other nations to follow whilst Shadow Chancellor George Osborne 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.^[8]

Also on the 8 October 2008 there was a strategic and co-ordinated global effort by seven central banks to calm the 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 and the U.S Federal reserve along with central banks in China, Switzerland, Canada and Sweden.

Comparison with U.S. TARP

The British rescue plan differed from the initial United States' $700bn bailout under the Emergency Economic Stabilization Act of 2008, which was announced on 3 October and entitled the Troubled Asset Relief Program (TARP). The £50bn being invested by the UK Government saw them purchasing shares in the banks, whereas the American program was primarily devoted to the U.S. government purchasing the mortgage backed securities of the American banks which were not able to be sold in the secondary mortgage securities market. The U.S. program required the U.S. government to take an equity interest in financial organisations selling their securities into the TARP^[9] but did not address the fundamental solvency problem faced by the banking sector; rather was aimed at tackling the immediate funding shortfall. The UK package tackled 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. Announced on 14 October, the U.S. subsequently undertook investments in banks through the Capital Purchase Program and the FDIC guaranteed banks' debt through the Temporary Lending Guarantee Program.^[1]

Capital investment

Through the Bank Recapitalisation Fund, the government bought a combination of ordinary shares and preference shares in affected banks. The amount and proportion of the stake taken in any one bank was negotiated with the individual bank. Banks that took the rescue packages had restrictions on executive pay and dividends to existing shareholders, as well as a mandate to offer reasonable credit to homeowners and small businesses.^[6] The long-term government plan was to offset the cost of this program by receiving dividends from these shares,^[5] and in the long run, to sell the shares after a market recovery.^[6] This plan covered the possibility of underwriting new issues of shares by any participating bank.^[5] The plan has been characterised as, in effect, partial nationalisation.^[10]

The extent to which different banks participated varied according to their needs. HSBC 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".^[11] Standard Chartered also declared its support for the scheme but its intention not to participate in the capital injection element.^[12] Barclays raised its own new capital from private investors.^[13]

The Royal Bank of Scotland Group raised £20 billion from the Bank Recapitalisation Fund, with £5 billion in preference shares and a further £15 billion being issued as ordinary shares.^[14] HBOS and Lloyds TSB together raised £17 billion, £8.5 billion in preference shares and a further £8.5 billion issue of ordinary shares. The Fund purchased the preference shares outright, for a total £13.5 billion investment, and underwrote the issues of ordinary shares.^[13]

Participating banks

The plan was open to all UK incorporated banks and all building societies, including the following:^[6]

• Abbey
• Barclays plc
• Clydesdale Bank
• HBOS
• HSBC / HSBC Group
• Lloyds TSB
• Nationwide Building Society
• Royal Bank of Scotland / Royal Bank of Scotland Group
• Standard Chartered Bank

However, of these, Abbey, Barclays, Clydesdale, HSBC, Nationwide, and Standard Chartered chose not to receive any government money,^[15] leaving Lloyds and RBS as the only major recipients.

Reactions

Paul Krugman the Nobel Prize winner for Economics stated in his New York Times column that "Mr Brown and Alistair Darling, the 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."^[16][17]

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 U.S. 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.

The shares in RBS and Lloyds have now started to be sold off. Labour has criticised the Conservative government for making what is likely to be a loss on the sale of the RBS shares. However the government countered that this will be more than made up for by a profit on the Lloyds shares and that waiting for longer to sell the RBS shares would not necessarily lead to a higher price for them.^[18][19] The loss to the tax payer of the first round of RBS share sell off is stated by the BBC to be £1.07bn compared to when they were sold.^[20]

See also

• Government intervention during the subprime mortgage crisis
• 2009 United Kingdom bank rescue package
• UK Financial Investments Limited
• List of banks in the United Kingdom

References

External links

• HM Treasury Press Notice 100/08 Financial support to the banking industry
• BBC News (Oct 2010) - Banks face new funding crisis