Financial support to the banking industry
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Released 08 October 2008
Financial support to the banking industry
After consultation with the Bank of England and the Financial Services
Authority, the Government announces that it is bringing forward specific and
comprehensive measures to ensure the stability of the financial system and to
protect ordinary savers, depositors, businesses and borrowers.
In summary the proposals announced today are intended to:
- Provide sufficient liquidity in the short term;
- Make available new capital to UK banks and building societies to
strengthen their resources permitting them to restructure their finances,
while maintaining their support for the real economy; and
- Ensure that the banking system has the funds necessary to maintain lending
in the medium term.
In these extraordinary market conditions, the Bank of England will take all
actions necessary to ensure that the banking system has access to sufficient
liquidity. In its provision of short term liquidity the Bank will extend and
widen its facilities in whatever way is necessary to ensure the stability of the
system. At least £200 billion will be made available to banks under the Special
Liquidity Scheme. Until markets stabilise, the Bank will continue to conduct
auctions to lend sterling for three months, and also US dollars for one week,
against extended collateral. It will review the size and frequency of those
operations as necessary. Bank debt that is guaranteed under the Government's
guarantee scheme will be eligible in all of the Bank's extended-collateral
operations. The Bank next week will bring forward its plans for a permanent
regime underpinning banking system liquidity, including a Discount Window
facility. In addition the Government is establishing a facility, which will
make available Tier 1 capital in appropriate form (expected to be preference
shares or PIBS) to “eligible institutions”. Eligible institutions are UK
incorporated banks (including UK subsidiaries of foreign institutions) which
have a substantial business in the UK and building societies. However
applications are invited for inclusion as an eligible institution from any other
UK incorporated bank (including UK subsidiaries of foreign institutions). In
reviewing these applications the Government will give due regard to an
institution’s role in the UK banking system and the overall economy.
Following discussions convened by HM Treasury, the following major UK banks
and the largest building society have confirmed their participation in a
Government-supported recapitalisation scheme. These institutions comprise:
- HSBC Bank plc
- Lloyds TSB
- Nationwide Building Society
- Royal Bank of Scotland
- Standard Chartered
These institutions have committed to the Government that they will increase
their total Tier 1 capital by £25bn. This is an aggregate increase and
individual increases will vary from institution to institution. In order to
facilitate this process the Government is making available £25bn to be drawn on
by these institutions if desired to assist in this process as preference share
capital or PIBS and is also willing to assist in the raising of ordinary equity
if requested to do so. The above institutions have committed to the Government
that this will be concluded by the end of the year.
In addition to this, the Government stands ready to provide an incremental
minimum of £25bn of further support for all eligible institutions, in the form
of preference shares, PIBS or, at the request of an eligible institution, as
assistance to an ordinary equity fund-raising.
The amount to be issued per institution will be finalised following detailed
discussions. If the Government is to provide the capital, the issue will carry
terms and conditions that appropriately reflect the financial commitment being
made by the taxpayer. 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 Government will take decisive action to reopen the market for medium term
funding for eligible institutions that raise appropriate amounts of Tier 1
Specifically the Government will make available to eligible institutions for
an interim period as agreed and on appropriate commercial terms, a Government
guarantee of new short and medium term debt issuance to assist in refinancing
maturing, wholesale funding obligations as they fall due. Subject to further
discussion with eligible institutions, the proposal envisages the issue of
senior unsecured debt instruments of varying terms of up to 36 months, in any of
sterling, US dollars or Euros. The current expectation is that the guarantee
would be issued out of a specifically designated Government-backed English
incorporated company. The Government expects the take-up of the guarantee to be
of the order of £250bn, and will keep this under review alongside ongoing
monitoring of capital positions and lending volumes.
To qualify for this support the relevant institution must raise Tier 1
capital by the amount and in the form the Government considers appropriate
whether by Government subscription or from other sources. It is being made
available immediately to the eight institutions named above in recognition of
their commitment to strengthen their aggregate capital position.
The Government has informed the European Commission of these proposals and is
actively talking to other countries about extending these proposals and has
committed to work together with them to strengthen the international system.
The Government is moving ahead immediately with the internationally agreed
proposal for colleges of supervision and other measures to improve supervision
of the system. After discussions with the major economies at the G7 meeting on
Friday, the Government and other countries agreed on the need for a meeting at
heads of Government level.
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Article Published/Sorted/Amended on Scopulus 2008-10-08 14:08:16 in Business Articles