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'Government package to help banking system'

October 10, 2008 at 12:35 pm

Prime Minister Gordon Brown hopes that his rescue package for the banking sector will “put the British banking system on a sounder footing”. The package announced on Oct 8th will make available £400bn worth of fresh cash, but analysts still fear that it has come too late to save the country from a long period of sluggish growth.

Under the new plan, banks will have to increase their capital by a minimum of £25bn and are able to approach the Government for a loan in order to do this. An extra £25bn will also be available in return for preference shares which pay a fixed rate of interest rather than a dividend, and which are paid ahead of payments to shareholders. £100bn will be available from the Bank of England in the form of short-term loans, in addition to the existing facility of £100bn.

In a bid to encourage banks to lend to each other, commercial-rate loan guarantees of £250bn will also be available. Much of the current crisis has been caused by banks not being prepared to lend to one another for long periods.

In order to qualify for the scheme, undertakings have had to be given to the FSA regarding pay, dividends to shareholders and future lending to businesses and home owners. The banks which have signed up to various parts of the rescue package are Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Royal Bank of Scotland, Standard Chartered and Nationwide Building Society.

The day after the plan was announced it seemed that the measures plus a 0.5% drop in interest rates were not sufficient to stop the stock market slide, and the Prime Minister and Chancellor will be hoping that international action can be agreed to steady the uncertainty.

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