Government takes £37bn stake in banks
The government is to inject £37 billion into Royal Bank of Scotland, HBOS and Lloyds TSB in a move that part-nationalises three of the biggest banks in the UK.
The move follows Gordon Brown unveiling his government’s banking bailout plan earlier this month, which included making capital available to seven banks and one building society.
The Treasury says it must make the capital available in order to “support stability in the financial system, protect ordinary savers, depositors, businesses and borrowers and to safeguard the interests of the taxpayer”.
However, it means that the government – and the taxpayer – will own around 60% of RBS and 40% of HBOS/Lloyds TSB (once its merger completes).
In return for the capital investment, the Treasury says it will ensure the availability of “competitively-priced” mortgages, plus deals for those struggling with their payments. It will also have the right to have an input into who runs the banks.
Alongside confirming its cash injection from the Treasury, Lloyds TSB has announced revised terms for its acquisition of HBOS. Under the terms of the original deal, HBOS shareholders were to receive 0.83 Lloyds TSB shares for every one HBOS share they held - valuing HBOS at £12.2 billion.
However, in light on “unprecedented turbulence in global financial markets”, Lloyds TSB is now offering HBOS shareholders 0.605 of its shares for every one HBOS share they hold.
The announcement this morning saw the FTSE 100 open 200 points up, but in the first hour of trading, HBOS shares were 8% down while RBS' were 2% down. Lloyds TSB, however, saw its share price leap 10%.
Meanwhile, banking giant Barclays says it has declined any capital from the Treasury at this time claiming it is “well capitalised” and with “access to the liquidity required to support its business”.
However, with the financial regulator now demanding UK banks to be better capitalised than in previous years, Barclays is planning to raise an additional £6.5 billion from investors rather than the government.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.