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Banks divided over £50bn cash injection



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Published Date: 09 October 2008
By MARK McLAUGHLIN

THE UK banking sector is divided over the Government's £50 billion cash injection aimed at freeing up money and reinvigorating the economy.
HSBC, Standard Chartered, and Abbey National have declared that they have no intention of raising capital from the state, preferring to first attempt to raise fresh capital from private investors.

Royal Bank of Scotland, Lloyds TSB, HBoS and Barclays are expected to be more willing accept the Government's cash.

RBS has been reeling from 15-year lows in its share price.

The Government cash offer is part of £400 billion package aimed at restoring stability to the unhinged financial system. Chancellor Alistair Darling is flying to the US today to discuss the co-ordinated cutting of interest rates by six central banks, again aimed at increasing confidence in the markets.

The chancellor will meet global financial leaders to discuss the half a percentage point reduction.

The cut in UK interest rates to 4.5 per cent from five per cent prompted six mortgage lenders to immediately reduce their rates by trimming their variable rates.

Halifax, Woolwich, Lloyds TSB, which also lends under the Cheltenham & Gloucester brand, First Direct which is part of HSBC, Royal Bank of Scotland and NatWest all announced they were going to cut their standard variable rate by half a percentage point.

UK and US share prices both fell despite Wednesday's surprise move.

In an indicator of the present volatility of the market, one property entrepreneur lost £1 billion in just 24 hours.

The three-pronged plan also offers guarantees of as much of £250bn of new bank debt, and adds £100bn to the existing Bank of England short-term loan scheme.

However, banks taking up offer will face constraints on their ability to increase dividends or offer executives large bonuses, and will be expected to make commitments to continue lending to small businesses and housebuyers.

Gordon Brown claimed the rescue package "led the world" and predicted that other countries could follow Britain's lead in guaranteeing interbank lending.

Last night Charles Schumer, a New York senator, said the US government should consider a similar scheme.

The US has already signed off on a $700bn "bailout" of its own banking sector. However, US treasury secretary Henry Paulson has warned some banks will still fail.

There was an equally stark warning from the International Monetary fund, which said global financial markets were facing their most dangerous shock since the 1930s.

Meanwhile, entrepreneur Robert Tchenguiz has been forced to offload his stakes in J Sainsbury and Mitchells & Butlers as the fallout of the Icelandic banking crisis hit corporate UK. He has lost £1bn on the sale.


The full article contains 444 words and appears in Edinburgh Evening News newspaper.
Page 1 of 1

 
1

Boy Wonder,

09/10/2008 14:52:19
THEY'RE DIVIDED?????

The bliddy crooks are fleecing us dry ... and we're letting them get away with it!
2

A Friend of Fernando Poo,

09/10/2008 15:03:18
#1: It's only 25,000 Pounds per taxpayer. Well worth it to save our excellent bankers and their extremely solvent banks.
3

tomias,

Edinburgh 09/10/2008 15:14:30
Right lads- just what can we the tax payers do? Really do?
Another Glasgow weavers type riot?
No community service there,no out at the big hoose immediately.
We are impotent.That is the essential core to democracy-as we know it Scotty!
4

Steve 'The Nugget' Davis,

Edinburgh 09/10/2008 17:02:46
#1 - I think that you're just reading the headline that says the banks are divided over the scheme. What is actually the case is that some of the banks are saying that they do not need to use the scheme, which is not the same thing as being divided on it.

#2 - The point that you're missing is that allowing some of the country's largest financial institutions to fail would have massive repercussions on the economy as a whole. While the bail-out scheme may be somewhat unpalatable, it is far better than the alternative. And, it's only going to cost a significant amount per taxpayer if the banks call on the full amount of support and then they still all go bust with no residual value.
5

A Friend of Fernando Poo,

09/10/2008 18:34:00
#4: The point that you're missing is that they may well go under anyway, taking all that cash with them.

The simple fact is that the real economic problem was the credit bubble: overborrowing, reckless lending, crazy asset prices etc.

What's happening now is the natural cure. Asset prices are being reduced. Reckless lenders and borrowers are being removed from the economy. Borrowing is being reined in to sustainable levels. Like some cures, it'll hurt for a while, but it will fix the problem and get us to a better and more sustainable economy.

To the extent that the government interferes with the medicine, it's going to cost a lot more, and take a lot longer, to get through this.

Just ask Japan. The government there couldn't quit meddling. Their bust started in 1989 and they're still not through it. They have Italian levels of government debt due to all the bailouts. They have house prices 60% to 90% down, and they're as often in recession as not.
6

Steve 'The Nugget' Davis,

Edinburgh 09/10/2008 19:02:43
#5 - Did you read my post before replying? The last sentence perhaps, where I acknowledge that if the banks take up the full funding/capital offered and then go bust that all the cash could be lost?

Without the government's action, we would have been at risk of being left with only 1 or 2 UK banks of any scale - that would massively reduce the prospect of any reasonable level of credit being available in the future and also lead to a highly uncompetitive market.

The Japanese government made the mistake of throwing cash at the situation without any strings attached - if the UK government attach sufficient conditions to the funding/capital then that will avoid a drawn-out crisis as suffered in Japan.
7

A Friend of Fernando Poo,

09/10/2008 20:04:37
#6: As I said, the problem was too much credit. Eliminating the deadbeat banks would reduce credit availability and hence fix the problem and move us towards an economy that relied on much less credit.

Cut it how you like, that's where we're headed. We can go the short way or the long way.

As for how much is likely to be lost, the World Bank published a study of banking crises and the return rate on money thrown at banks in this way was extremely low.

Certainly I can find better uses for my 25 grand. How about you?
8

Jimmy Twoshoes,

09/10/2008 20:11:41
The World Bank report you are oh so keen to mention is of little to no relevance here.... I'm sure you can understand why.

As for 'deadbeat banks', one of the (many) problems with that statments is that it's not currently possible to tell the good from the bad - the well capitalised banks aren't faring better, and the biggest difference between them is the exposure to wholesale funding. Again, I'm sure you know this but have your own points to make.
9

A Friend of Fernando Poo,

09/10/2008 20:55:18
#8: No, I have no idea why a World Bank report wouldn't be relevant. Has Britain left the world and I missed it?

As for telling good banks from bad banks. I know of a simple tried and tested way:

Leave them alone. The bad banks will go bankrupt and the good ones will survive to take over the functioning parts of their business. That, lest we forget, is how things are supposed to work.
10

Steve 'The Nugget' Davis,

Edinburgh 09/10/2008 21:22:04
#9 - In any normal circumstance, your assertion - that bad banks will go bankrupt and good ones will survive - would stand. However, these are not normal circumstances - this is a 1-in-100-year economic downturn (or thereabouts)

While the main cause of the current crisis has been an over-supply of credit to people and businesses that were very poor credit risks, an over-contraction of available credit lines will drive a deep, long-lasting depression that will cause thousands of companies to fold and leave masses unemployed.

By letting strongly capitalised and well funded banks go to the wall, we would end up with so few banks that credit would be severely limited and competition would be virtually eliminated.

 

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