Brown unveils 'solution' to bank crisis

6 October 2008

Gordon Brown has unveiled a plan to 'rescue' the British banking sector that will see the government pump around £50 billion of taxpayers money into eight of the biggest names on thehigh street.

The announcement comes after Brown held emergency talks with the Bank of England, the City watchdog and his chancellor, Alistair Darling, to find a solution to the current banking crisis.

The plan includes the government making around £50 billion available to some of the biggest banks, in return for preference shares in those institutions. The banks are: Abbey, Barclays, HBOS, HSBC, Lloyds TSB and Royal Bank of Scotland. Nationwide Building Society and Standard Chatered are also included in the plan.

The amount to be issued per bank will be "finalised following detailed discussions", the Treasury says.

In addition, at least £200 billion will be made available to banks under Bank of England's Special Liquidity Scheme.

Read the Treasury's statement in full

Mortgage lenders have welcomed the move. The Council of Mortgage Lenders says that it should help underpin consumer confidence and help "manage the problems" of the economic downturn.

Michael Coogan, director general of the CML, says: "From what we can see so far, this seems to be a decisive, coordinated and reasonable package of measures that address both the relevant factors necessary to support a return to market stability.

"The flow of funding to support mortgage lending has been severely constrained, and these measures will help to create more positive conditions for the mortgage market.”

And Paul Niven, head of asset allocation at F&C, says the bailout marks a new era for global banking.

"In return for taxpayers money, the [government] will gain a level of control over their governance, pay, and lending practices. Regulation will increase markedly and controls on all elements of banking practices will rise," he explains.

The measures couldn't be more urgent; banks saw their value all but wiped out yesterday, with shares in HBOS down 42%, Royal Bank of Scotland 39%, Barclays 9% and Lloyds TSB 13%. This morning HBOS' share price jumped 30% after it confirmed acquisition talks with Lloyds TSB were "on track"

On Tuesday 7 October, European Union finance ministers agreed to increase the guarantee for customers' savings to at least €50,000 (£37,000). Spain then decided to increased its saver guarantee to €100,000 (around £77,000) in an attempt to reassure savers that their money is safe.

This follows all 27 members of the European Union - including the UK - pledging to take "whatever measures are necessary" to ensure the stability of banks, protection of taxpayers and security of savers.

This could include pumping money into the financial sector via central banks, taking certain firms under public ownership or increasing the amount of savers' money that is protected.

A statement from the countries - which have been divided on issues such as deposit protection - reads: "No depositor in the banks of our countries has suffered losses and we will continue to take the necessary measures to protect the system and depositors. In taking these measures, European leaders acknowledge the need for close coordination and cooperation."

The Department for Business has also made moves to introduce new laws that will enable MPs to approve banking mergers.

Shriti Vadera, minister for economic competitiveness and small business, said: "The government took swift action in relation to the proposed merger of Lloyds TSB and HBOS to support the UK financial system. In the present economic climate it is vital that financial stability can be considered alongside competition questions."

On 6 October, chancellor Alistair Darling said the British government was exploring all practical options to bring stability back to the banking sector

In a special statement to the House of Commons, Darling said people were "rightly" worried about the problems rocking the financial world. He added that the UK would do whatever necessary to bring back stability to the financial sector, defend taxpayers and protect depositors and savers.

"The governor [Mervyn King] of the Bank of England is willing to do whatever is necessary to ensure banks have the funding they need, and is willing to make further resources available as necessary," Darling said.

Darling also hinted at his displeasure at the moves by other European Union countries to offer 100% protection: "Countries should work together wherever possible... As far as I am aware no EU member state was aware that the Irish government was planning to increase savers' guarantee to 100%... It does demonstrate the problems that arise when EU member states take action independently of other states."

All 27 EU member states have now signed a declaration promising that "whatever is done, all members work together and act together".

The Conservative Party offered its "constructive" support to the government, with shadow chancellor George Osborne calling for all MPs to "work together" to bring back liquidity, confidence and stability.

He added: "Boom has turned to bust, now bust must not become something worse. That's why the Conservatives stand ready to help."

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