Skip to main navigation or content
Extraordinary times. The state already owns one bank outright. Within a few weeks, it could own big stakes in eight more. As Geoffrey Robinson quipped last night, Labour is finally getting to deliver on its 1983 manifesto pledge to take banks into public ownership, although not quite in the circumstances that Michael Foot imagined.
Advertising
These are the banks that have been invited to apply for government capital injections: Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland and Standard Chartered. Not all of them will - HSBC and Standard Chartered have already indicated they don't need taxpayers' cash.
Any capital injection is likely to be in the form of subscription to preference shares or permanent interest-bearing shares (Pibs). This is 'Tier one' capital - to strengthen the reserves that banks are obliged to hold under the Basel agreement on capital adequacy. It isn't capital that's going to be lent out to businesses and consumers.
That money will - hopefully - come from a expansion of the Bank of England's special liquidity scheme, which the banks will use in lieu of the frozen interbank market. Critically, the government has also guaranteed medium-term inter-bank lending.
But in a possible harbinger of things to come, the injection of taxpayers' cash comes with strings attached. "In reaching agreement on capital investment 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 Treasury's statement says.
That means big bonuses and dividends are out of the question for now, and raises big questions about how banks are going to be regulated in future. It also sends a very strong message that the government is intervening to safeguard the interests of creditors and depositors, with shareholders' priorities coming bottom of the list.
Reactions to the government's plan:
"'We welcome this comprehensive package of measures in response to unprecedented conditions in the financial system. These are a substantial and tangible demonstration of the government's commitment to ensuring the stability of the financial system and will allow banks to continue their support for customers across the economy." - Sir Fred Goodwin, Royal Bank of Scotland
"'Barclays welcomes the package of measures which the Government has announced this morning. The package addresses the most significant issues in the market, namely confidence in the strength of the banking system and the working of the money markets." - John Varley, Barclays
"These measures are positive for interbank liquidity and a necessary step towards much needed bank recapitalisation. Whether or not the sums involved are sufficient, hinges on the extent to which the banks have accurately valued their assets...We would also expect the banks to consult with their long term institutional shareholders as to the terms of the arrangements they will be entering with the Government." - Investment Management Association.
"We welcome today's essential measures which strengthen the British banking system, and will help provide financial stability for the country. British business is facing a freezing of bank finance. Many companies need this action to keep investment and working capital flowing." - Confederation of British Industry.
"We welcome the Chancellor's package. We hope and trust it will bring movement to the market which has been paralysed for some time. The most essential commodity at the moment is confidence and we believe the government's move will bring confidence back to the market." - Association of Private Client Investment Managers and Stockbrokers
"We welcome the government proposals to improve the capitalisation and liquidity of the banking sector...However the suggestion that the government will enforce reductions in dividends...will dismay many of our members who rely on such dividends for their retirement income. Similarly the general public will suffer a major reduction in their pension benefits in many cases if the dividend income to institutional pension funds was restricted." - UK Shareholders Association.
Banking bail-out spells dividend cuts- and could scupper the Lloyds/HBOS merger
Reassuring noises on Icesave - the UK will stand by savers, even if Iceland won't
My Icesave woes - Moira O'Neill wants her cash back
The Bonnie Tyler solution - markets are holding out for a hero, according to Chris Dillow
Mr Darling the hedge fund manager - heaven help us...
See our special banking crisis page for more...
The UK’s No.1 Stockbroker
Access a selection of share tips, comprehensive company analysis and full financial data on listed companies. Plus portfolio tools with advanced alerts when you register for free here.
Advertorial Feature
With so many big moves in the world's financial markets, there have seldom been more opportunities around for spread traders. Isn't it time you joined them?
by Dominic Piccarda
© The Financial Times Limited 2008. All rights reserved. "Investors Chronicle", "FT" and "Financial Times" are trademarks of The Financial Times Limited. No part of these web pages may be reproduced or transmitted to or stored in any other website or other form of electronic retrieval system, without prior permission in writing from the editor.
Warning: Do remember, particularly if you are new to stock market investment that the prices of shares and other investments can fall sharply. You may not get back the money you originally invested. The material here is for general information only and is not intended to be relied upon for individual investment decisions. Take independent advice before making such decisions. This site is aimed at UK residents only. To read more please see our Important Warning
-IC-1.5.4a-prod - 31/10/2008 13:11:34 - carlos.princz
