UK announces £50b. 'radical' plan to stabilize banks

8 October 2008

London-The British government announced a 50 billion pounds (US$87.5 billion) plan on Wednesday to partly nationalize major banks, with taxpayers taking stakes in a bid to shore up a financial sector hard hit by the world financial crisis.

Prime Minister Gordon Brown billed it as a "radical" plan to stabilize banks so that they could resume normal lending and other operations, rather than trying to buy up bad assets as the United States is doing. The government also offered up to 200 billion pounds (US$350 billion) in short-term lending support.

"All these are investments being made by the government which will earn a proper return for the taxpayer," he told a news conference. "This support is on commercial terms. We expect to be rewarded for the support we provide."

A half hour before markets opened Wednesday, the Treasury said it would be investing up to 50 billion pounds in exchange for preference shares in eight of the county's largest banks and building societies: Abbey National PLC, Barclays PLC, HBOS PLC, HSBC Bank PLC, Lloyds TSB Bank PLC, Nationwide Building Society, Royal Bank of Scotland and Standard Chartered Bank.

The Treasury said government support would come with strings attached: "The government will need to take into account dividend policies and executive compensation practices and will require a full commitment to support lending to small businesses and home buyers."

The rescue plan comes a day after British banks' stock prices plummeted on investor fears that they wouldn't be able to survive the global financial turmoil without help from the government. On Tuesday, shares in the Royal Bank of Scotland Group PLC, the country's third largest bank, plummeted by 39 percent, HBOS PLC fell 41.5 percent and Lloyds TSB Group PLC dropped 13 percent.

"This is not a time for conventional thinking or outdated dogma but for the fresh and innovative intervention that gets to the heart of the problem," Brown told a news conference.

"I think some people may have been expecting simply a capitalization scheme today but this is radical action across the system - the restructuring of banks under the conditions set down, a tough deal for everybody but the right deal for the British public, and it's accompanied by the security that long term funding and medium term funding can now be provided," Brown said.

Treasury chief Alistair Darling said the government was "absolutely not" seeking to take control of the banks.

"We are not talking about running the banks. The banks will are going to be run as commercial operations, albeit with government help in restructuring," he said at the news conference with Brown.

Britain had previously nationalized two mortgage lenders, Northern Rock and Bradford & Bingley. It hopes to return them to the private sector.

Darling also announced that the government would guarantee British savers' accounts in Icesave, the Internet operation of Iceland's Landsbanki which was nationalized on Tuesday. Icesave suspended its operations on Tuesday.

Brown said the government was taking legal action against Icelandic authorities to recover funds deposited in British branches of Icelandic banks, but details of the British guarantees on Icelandic accounts were not immediately spelled out.

The Treasury also said the Bank of England would be expanding its Special Liquidity Scheme to facilitate short-term borrowing and help to free up credit markets. Under the expansion, it will make at least 200 billion pounds (US$350 billion) worth of three month loans available to the country's banks.

The market largely welcomed the Treasury's move, and banks' share prices began stabilizing and recovering in early trading.

HBOS jumped 20 percent, although the Royal Bank of Scotland fell 10 percent.

"The markets are still getting to grips with the detail," said Keith Bowman, equity analyst Hargreaves Lansdown Stockbrokers. "I hope to see some stabilization by the end of the day, but what we actually see is anybody's guess."

Even if it does engender confidence, the government's financial injection is limited, said Bowman, by the fact that the overall environment in which banks are operating on the global stage are negative. "The world economy is deteriorating and there's no doubt that regulation will increase for the banking sector."

Alex Potter, analyst at Collins Stewart, said the government had "procrastinated far too long," but he said the plan should help stabilize banks at the expense of dividends for shareholders.

"The government is insisting on tighter control of capital, dividends and executive pay. We feel that dividend payouts for the main four UK domestic banks will be severely impacted with the possibility of no cash payout until 2010 or later," Potter said.

But not everyone was happy.

"Without full nationalization the government is effectively nationalizing the banks losses and privatizing the profits so that taxpayers will now pay for this crisis caused by the greed of the bankers," said Labour lawmaker John McDonnell.

The rescue plan marks a sharp turn in the fortunes of Britain's proud banking sector, which until this week seemed to be more immune to the global financial crisis than America's beleaguered financial institutions.

Just three weeks ago, Barclays snapped up the US banking operations of Lehman Brothers, the collapsed Wall Street giant.

On Sept. 18, Lloyds TSB announced that it intended to take over HBOS in a government arranged commercial rescue of the country's biggest mortgage lender.

Royal Bank of Scotland led a consortium which last year swallowed Fortis Dutch bank ABN Amro Holding NV for 72 billion euros (US$98 billion).