The U.K. government yesterday (Wednesday) announced its own banking bailout
package with an $87 billion (50 billion pound) recapitalization plan for the
ailing British financial sector.
“The global market has ceased to function,” British Prime Minister Gordon Brown said yesterday at a press conference in London.
“The banking system must be sounder, and that is why we are putting the capital
in.”
Under the plan, the U.K. Treasury will provide $43.5 billion (25 billion
pounds) to recapitalize banks and boost their Tier 1 capital ratio. A bank’s Tier 1 capital ratio is a key
indicator of the firm’s financial strength. An additional $43.5 billion (25
billion pounds) will be available if needed.
In addition, the Bank of England, the nation’s central bank, will increase
the amount of funds available for short-term lending to $346 billion (200
billion pounds). The plan further guarantees an additional $432 billion (250
billion pounds) in loans.
“The Bank of England will take all actions necessary to
ensure that the banking system has access to sufficient liquidity,” the
central bank said in a statement, The Financial Times
reported. “In its provision of short-term liquidity the Bank will extend and
widen its facilities in whatever way is necessary to ensure the stability of the
system.”
The Bank of England also cut its benchmark lending rate a half-point bringing
it to 4.5%. [Please click here for a related story on the coordinated global central bank rate cuts in today’s issue
of
Money Morning.]
The following banks plan to take advantage of the government assistance:
Other U.K. banks and building societies are invited to apply for the program
as well, The FT reported.
Britain’s blue-chip FTSE 100 Index hit a four-year closing low as it dropped
5.2% despite the government’s bailout package and the rate cut.
“These measures will not, of course, prevent the
recession which is already underway. The aim is to reduce the risk that
recession turns into depression,” Citigroup Inc. (C)
economist Michael Saunders told MarketWatch.
Saunders cautioned that additional government measures could be needed to
stabilize the British economy, including further capital infusions.
“We are probably not even half way through the decline in U.K. house prices.
We are not even close to half way through the U.K. recession,” Saunders said.
“Much of the economic pain still lies ahead.”
