The government had hoped that last October's £50bn hand-out of taxpayers' money to recapitalise the UK's high street banks - as well as the provision of a £250bn liquidity scheme - would bring some long-term stability to the sector. It also hoped that the recapitalised banks, supported by falling interest rates, would be able to start lending again - and therefore help it to stop the economy from sliding into the deepest recession since the 1930s.
But such hopes have gone unfulfilled.As bankers struggle to find the capital to cover their losses on such toxic assets as sub-prime mortgage backed securities, they have been unable to engage in more lending. Earnings, then, have collapsed. Moreover, and to top it all, it's beginning to look as if some lenders could need more capital to cover losses. In response, bank share prices have again begun to tumble.
That explains the government's second bail-out plan this week - although the purpose this time is to push banks to start lending again rather than keep them afloat. Possibly the most significant and costly proposal involves offering a form of insurance scheme for the worst quality assets. For a fee, that will allow banks to pass on the risk of losses from their weakest quality assets to the taxpayer - in return, though, the banks will be obliged to lend to credit-starved consumers and companies. Analysts at Merrill Lynch reckon the plan could allow Barclays, Royal Bank of Scotland (RBS) and Lloyds to avoid about £27bn of losses on toxic assets in total, although they could collectively pay a fee of nearly £4bn for this cover.
As well as extending the existing £250bn liquidity facility until 31 December, another key measure involves tweaking banks' regulatory capital requirements. The tier one capital ratio - which compares the better quality forms of capital against loans – is being reduced by regulators from 8 per cent to between 6 per cent and 7 per cent. That should allow banks to immediately free-up capital in order to back more lending. And the government plans to bolster the much reduced supply of mortgages by giving Northern Rock more time to repay the £26.9bn used to bail it out in 2007. The problem was that Northern Rock's priority had been to repay its loan to the Bank of England and had been encouraging its customers to remortgage elsewhere in its attempt to do so.
But the proposals haven't been welcomed by everyone. The UK Shareholders Association has described them as "nationalisation by stealth" - and vowed to oppose further "confiscation" of shareholders' property without proper compensation.
