2008 United Kingdom bank rescue package
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.
- Background 1
The rescue plan 2
- Capital investment 2.1
- Participating banks 3
- Reactions 4
- See also 5
- References 6
- External links 7
The announcement came less than 48 hours after Britain's leading share index, the FTSE100, recorded its largest single-day points fall since 1987. A similar bailout package had been passed in the United States the previous week, as the Emergency Economic Stabilization Act of 2008.
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. 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.
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.
The British rescue plan differed from the
- HM Treasury Press Notice 100/08 Financial support to the banking industry
- BBC News (Oct 2010) - Banks face new funding crisis
- "Stocks slide despite reassurances". BBC News. 2008-10-06. Archived from the original on 7 October 2008. Retrieved 2008-10-08.
- Darling, Alastair (8 October 2008). "Statement by the Chancellor on financial stability". HM treasury. Archived from the original on 11 October 2008. Retrieved 2008-10-09.
- "Central banks cut interest rates". BBC News. 2008-10-08. Archived from the original on 10 October 2008. Retrieved 2008-10-08.
- "Hansard". Hansard. 2008-10-06. Archived from the original on 12 October 2008. Retrieved 2008-10-10.
- Barker, Alex (2008-10-08). "Brown says UK leads world with rescue".
- "Q&A: How will the UK bailout work?". CNN. 2008-10-08. Archived from the original on 8 October 2008. Retrieved 2008-10-08.
- Wearden, Graeme (2008-10-08). "Government to spend £50bn to part-nationalise UK's banks". The Guardian. Archived from the original on 9 October 2008. Retrieved 2008-10-08.
- Capital base of HSBC UK strengthened, 9 October 2008
- Standard Chartered welcomes UK Government announcement 8 October 2008
- "UK banks receive £37bn bail-out". BBC News Online. 13 October 2008. Archived from the original on 14 October 2008. Retrieved 2008-10-13.
- RBS Investor Relations (2008-10-13). "Royal Bank of Scotland Group PLC - Capital Raising". Archived from the original on 16 October 2008. Retrieved 2008-10-13.
- Thompson, Melissa (20 January 2009). "How toxic is YOUR bank?".
- Government intervention during the subprime mortgage crisis
- 2009 United Kingdom bank rescue package
- UK Financial Investments Limited
- List of banks in the United Kingdom
- Hypo Group Alpe Adria
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 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.
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."
However, of these, Abbey, Barclays, Clydesdale, HSBC, Nationwide, and Standard Chartered chose not to receive any government money, leaving Lloyds and RBS as the only major recipients.
- Barclays plc
- Clydesdale Bank
- HSBC / HSBC Group
- Lloyds TSB
- Nationwide Building Society
- Royal Bank of Scotland / Royal Bank of Scotland Group
- Standard Chartered Bank
The plan was open to all UK incorporated banks and all building societies, including the following:
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. 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.
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". Standard Chartered also declared its support for the scheme but its intention not to participate in the capital injection element. Barclays raised its own new capital from private investors.
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. The long-term government plan was to offset the cost of this program by receiving dividends from these shares, and in the long run, to sell the shares after a market recovery. This plan covered the possibility of underwriting new issues of shares by any participating bank. The plan has been characterised as, in effect, partial nationalisation.
problem faced by the banking sector, but 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. solvency The U.S. programme therefore did not address the fundamental