Britain's banks will get an unprecedented 50 billion-pound ($87 billion) government lifeline and emergency loans from the central bank after the freeze in credit markets threatened to bring down the financial system.
The government will offer to buy preference shares to help boost capital at Royal Bank of Scotland Group Plc, Barclays Plc and at least six other banks, the Treasury said in a statement today. The plan also guarantees about 250 billion pounds of loans and increases the amount the Bank of England makes available for banks to borrow to at least 200 billion pounds.
The emergency action failed to stem the stock market rout, with the U.K.'s benchmark FTSE 100 Index falling 5.2 percent today to a five-year low. Prime Minister Gordon Brown is following U.S. President George W. Bush, who approved a plan last week to spend $700 billion to prop up financial institutions with untested measures as equities plunged around the world.
``The global market has ceased to function,'' Brown said today at a press conference in London. ``The banking system must be sounder, and that is why we are putting the capital in.''
Brown's government was forced to act as Britain tumbled toward a recession and shares of the country's biggest banks lost more than half their value in a week. Edinburgh-based RBS, Britain's third-largest bank by market value, had its credit rating cut by Standard & Poor's for the first time in almost a decade on concern that its financial health was deteriorating.
`Building Blocks'
The steps to partially nationalize the industry provide the ``building blocks to allow banks to return to their basic function of providing cash and investment,'' Chancellor of the Exchequer Alistair Darling said today.
While government support totaling 500 billion pounds for banks will help in the short term, ``even these huge amounts will not avert the downward course of the U.K.,'' said Sandy Chen, a London-based analyst at Panmure Gordon & Co., who has ``sell'' ratings on Barclays and RBS. ``House prices will continue to fall, unemployment will continue to rise.''
Britain joins the U.S. and many European countries in rushing out bailout measures. Germany, Ireland and Greece have pledged to guarantee savers' deposits. Iceland has taken over two of the nation's three biggest banks, and Spain has agreed to spend as much as 50 billion euros ($68 billion) to buy bank assets.
The U.K. initiative comes after the government took control of Northern Rock Plc and Bradford & Bingley Plc earlier this year and arranged for London-based Lloyds TSB Group Plc, the U.K.'s biggest provider of checking accounts, to take over Edinburgh- based HBOS Plc, the country's biggest mortgage lender.
Weaker Banks
``The weaker banks were being dealt with by nationalization or acquisition, leaving a smaller number of stronger banks with greater market share,'' said Fidelity International Ltd.'s Sanjeev Shah, who took over the $4 billion U.K. Special Situations Fund from Anthony Bolton this year.
Brown may have to break his pledge to keep debt below 40 percent of Britain's gross domestic product to keep the financial- services industry from collapsing under the weight of the global credit crunch. Financial companies, which account for about a fifth of London's economy, will cut 12,000 jobs before the end of the year, about 33 percent more than a year earlier, according to estimates last month from the Confederation of British Industry.
The budget deficit climbed to the highest since 1993 in August, with debt amounting to 43 percent of GDP when the liabilities of Northern Rock are factored in.
Preference Shares
The government plans to make 25 billion pounds immediately available to banks in the form of preference shares and is ready to provide another 25 billion pounds. It doesn't specify how much would go to each bank.
London-based HSBC, Europe's biggest bank, said it doesn't plan to receive capital from the U.K. because it has sufficient funding. Standard Chartered Plc, the London-based bank that makes most of its profit in Asia, and Abbey National, the U.K. unit of Spain's Banco Santander SA, also said they won't seek capital from the government.
RBS, HBOS, Barclays and Lloyds TSB praised the funding plan and said they will study it before saying how they might use it.
``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,'' Barclays Chief Executive Officer John Varley said today in statement.
Most British banks fell in London trading, even after central bankers in the U.S. and Europe announced a coordinated cut in interest rates. Standard Chartered fell 12 percent, Lloyds TSB declined 6.9 percent and Barclays dropped 2.4 percent. HBOS jumped 24 percent, recouping more than half of yesterday's drop, and RBS rose less than 1 percent.
Not for Shareholders
``The point of this is not to bail out shareholders in banks,'' said Charles Mackinnon, chief investment officer at London-based Thurleigh Investment. ``The point is not to pay executive bonuses. It's to enable the economy to keep on going.''
The government should have specified how much capital goes to each bank, said Robert Talbut, who manages 31 billion pounds at Royal London Asset Management in London. ``To say 25 billion pounds is available and it's up to each bank how they will draw it down isn't credible,'' he said.
While RBS denied yesterday that it asked the government for help, the bank has been short of capital since it paid about 14 billion euros ($19 billion) last year for the investment banking and Asian units of Amsterdam-based ABN Amro Holding NV. The 12.3 billion pounds that RBS raised by selling shares at 200 pence apiece in June wasn't enough, and shares now trade for about half as much.
Borrowing Costs
RBS, Barclays, Lloyds TSB and three other U.K. banks need to repay as much as 54 billion pounds of debt by the end of March 2009 as borrowing costs reach record highs and banks are reluctant to lend to each other. The total, which includes bonds, convertible bonds and commercial paper, is triple the debt repaid in the same period a year ago.
Barclays said it has no debt that counts as regulatory capital maturing before the end of March.
The government plan will address ``unprecedented conditions in the financial system'' and help RBS strengthen its position, RBS Chief Executive Officer Fred Goodwin said in a statement.
RBS, which bought NatWest bank for 24 billion pounds in 2000, is struggling along with other U.K. banks with rising defaults and a slumping housing markets.
The bank, which had 5.9 billion of writedowns and a net loss of 761 million pounds in the first half, will have about 1.1 billion pounds of writedowns later this year, threatening its ability to reach a target of raising Tier 1 equity capital to 6 percent by the end of 2008, analysts at JPMorgan Chase & Co. said Oct. 1.
Management Changes
RBS didn't discuss management changes as part of its participation in the U.K. funding plan, spokeswoman Carolyn McAdam said today. A report in London's Daily Telegraph, which said the CEO and chairman of RBS would step down, was inaccurate, she said.
HBOS, which agreed Sept. 18 to a takeover by Lloyds TSB, said the new U.K. funding plan ``is very much in the interests of shareholders and customers.''
Lloyds TSB ``is working with HBOS management on all aspects of the transaction,'' the London-based bank said today in a statement.
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