2008 United Kingdom bank rescue package

A bank rescue package totalling some £500 billion (approximately $850 billion) was announced by the British government on 8 October 2008, as a response to the global financial crisis.[1][2][3] After two unsteady weeks at the end of September, the first week of October had seen major falls in the stock market and severe worries about the stability of British banks. The plan aimed to restore market confidence and help stabilise the British banking system, and provided for a range of what was claimed to be short-term "loans" from the taxpayer and guarantees of interbank lending, including up to £50 billion of taxpayer investment in the banks themselves. The government also bought shares in some banks, which have since been sold back to the market at an overall profit to the taxpayer.[4]

Alistair Darling, Chancellor of the Exchequer in 2008.
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Subsequently, broadly similar measures were introduced by the United States and the European Union in response to the financial crisis.[5][6][7] Some commentators noted that, although under the capitalist model inefficient private commercial enterprises should be allowed to go bust, the banks were "too big to fail".

Background
Main article: Financial crisis of 2007–2008

The announcement came less than 48 hours after Britain's leading share index, the FTSE100, recorded its largest single-day points fall since 1987.[8]

The rescue plan

The plan provided for several sources of funding to be made available, to an aggregate total of £500 billion in loans and guarantees. Most simply, £200 billion was made available for short term loans through the Bank of England's Special Liquidity Scheme. Secondly, the Government supported British banks in their plan to increase their market capitalisation through the newly formed Bank Recapitalisation Fund, by £25 billion in the first instance with a further £25 billion to be called upon if needed. Thirdly, the Government temporarily underwrote any eligible lending between British banks, giving a loan guarantee of around £250 billion.[9] However, only £400 billion of this was 'fresh money', as there was already in place a system for short term loans to the value of £100 billion.[10]

Alistair Darling, the Chancellor of the Exchequer, told the House of Commons in a statement on 8 October 2008 that the proposals were "designed to restore confidence in the banking system", and that the funding would "put the banks on a stronger footing".[11] Prime Minister Gordon Brown suggested that the government's actions had 'led the way' for other nations to follow whilst Shadow Chancellor George Osborne stated that "This is the final chapter of the age of irresponsibility and it’s absolutely extraordinary that a government has been driven by events to today's announcement"; in addition to offering opposition support for the plan.[12]

Also on the 8 October 2008 there was a strategic and co-ordinated global effort by seven central banks to calm the financial crisis, by cutting interest rates by 0.5%. The banks were all members of the OECD and included The Bank of England, The European Central Bank and the U.S Federal reserve along with central banks in China, Switzerland, Canada and Sweden.

Comparison with U.S. TARP

The British rescue plan differed from the initial United States' $700bn bailout under the Emergency Economic Stabilization Act of 2008, which was announced on 3 October and entitled the Troubled Asset Relief Program (TARP). The £50bn being invested by the UK Government saw them purchasing shares in the banks, whereas the American program was primarily devoted to the U.S. government purchasing the mortgage backed securities of the American banks which were not able to be sold in the secondary mortgage securities market. The U.S. program required the U.S. government to take an equity interest in financial organisations selling their securities into the TARP[13] but did not address the fundamental solvency problem faced by the banking sector; rather was aimed at tackling the immediate funding shortfall. The UK package tackled both solvency, through the £50bn recapitalisation plan, and funding, through the government guarantee for banks' debt issuances and the expansion of the Bank of England's Special Liquidity Scheme. Announced on 14 October, the U.S. subsequently undertook investments in banks through the Capital Purchase Program and the FDIC guaranteed banks' debt through the Temporary Lending Guarantee Program.[5]

Capital investment

Through the Bank Recapitalisation Fund, the government bought a combination of ordinary shares and preference shares in affected banks. The amount and proportion of the stake taken in any one bank was negotiated with the individual bank. Banks that took the rescue packages had restrictions on executive pay and dividends to existing shareholders, as well as a mandate to offer reasonable credit to homeowners and small businesses.[10] The long-term government plan was to offset the cost of this program by receiving dividends from these shares,[9] and in the long run, to sell the shares after a market recovery.[10] This plan covered the possibility of underwriting new issues of shares by any participating bank.[9] The plan has been characterised as, in effect, partial nationalisation.[14]

The extent to which different banks participated varied according to their needs. HSBC Group issued a statement announcing it was injecting £750 m of capital into the UK bank and therefore has "no plans to utilise the UK government's recapitalisation initiative ... [as] the Group remains one of the most strongly capitalised and liquid banks in the world".[15] Standard Chartered also declared its support for the scheme but its intention not to participate in the capital injection element.[16] Barclays raised its own new capital from private investors.[17]

The Royal Bank of Scotland Group raised £20 billion from the Bank Recapitalisation Fund, with £5 billion in preference shares and a further £15 billion being issued as ordinary shares.[18] HBOS and Lloyds TSB together raised £17 billion, £8.5 billion in preference shares and a further £8.5 billion issue of ordinary shares. The Fund purchased the preference shares outright, for a total £13.5 billion investment, and underwrote the issues of ordinary shares.[17]

Participating banks

The plan was open to all UK incorporated banks and all building societies, including the following: Abbey, Barclays, Clydesdale Bank, HBOS, HSBC, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland, Standard Chartered Bank.[10]

However, of these, Abbey, Barclays, Clydesdale, HSBC, Nationwide, and Standard Chartered chose not to receive any government money,[19] leaving Lloyds and RBS as the only major recipients.

Darling said in 2018 that the country was hours away from a breakdown of law and order if the Royal Bank of Scotland had not been bailed out and people could not access money.[20]

Reactions

Paul Krugman, writing in his column for The New York Times, stated that "Mr Brown and Alistair Darling, the Chancellor of the Exchequer have defined the character of the worldwide rescue effort, with other wealthy nations playing catch-up." He also stated that "Luckily for the world economy,... Gordon Brown and his officials are making sense,... And they may have shown us the way through this crisis."[21][22] Other commentators noted that although the capitalist model should have allowed inefficient businesses to go bust, the banks were "too big to fail".[23]

The British banking bail-out example was closely followed by the rest of Europe, as well as the U.S Government, who on the 14 October 2008 announced a $250bn (£143bn) Capital Purchase Program to buy stakes in a wide variety of banks in an effort to restore confidence in the sector. The money came from the $700bn bail-out package approved by U.S. lawmakers earlier that month.[5]

A wave of international action to address the financial crisis had at last an effect on stock markets around the world. Although shares in the affected banks fell, the Dow Jones went up by more than 900 points, or 11.1 per cent, while London shares also bounced back, with the FTSE100 Index closing more than 8 per cent higher on the 13 October 2008.

The shares in RBS and Lloyds have now started to be sold off. Labour criticised the Conservative government for making a huge loss for taxpayers on the sale of the RBS shares. The government claimed that this will be more than made up for by a profit on the Lloyds shares and that waiting for longer to sell the RBS shares would not necessarily lead to a higher price for them. The loss to the tax payer of the first round of RBS share sell off is stated by the BBC to be £1.07bn compared to when they were sold.[24] Other estimates were that the loss to taxpayers,[25] and a consequent subsidy to private shareholders in the bank, was £2 billion.[26]

See also

References
  1. "Bank bailout: Alistair Darling unveils £500billion rescue package". The Telegraph. 8 October 2008. Retrieved 3 October 2017.
  2. "Gordon Brown hails £500 billion bank rescue plan". The Telepraph. 8 October 2008. Retrieved 3 October 2017.
  3. "Rescue plan for UK banks unveiled". BBC. 8 October 2008. Retrieved 3 October 2017.
  4. "Lloyds claims taxpayers have made £900m profit from bailout". The Guardian. 17 May 2017. Retrieved 18 March 2020.
  5. Langley, Paul (2015). Liquidity Lost: The Governance of the Global Financial Crisis. Oxford University Press. pp. 82–86. ISBN 978-0199683789.
  6. "Financial crisis: Gordon Brown urges EU leaders to follow Britain's lead". The Telegraph. 12 October 2008. Retrieved 2 February 2016.
  7. "Gordon Brown's plan is model for EU response to financial crisis". The Telegraph. 13 October 2008. Retrieved 2 February 2016.
  8. "Stocks slide despite reassurances". BBC News. 2008-10-06. Archived from the original on 7 October 2008. Retrieved 2008-10-08.
  9. Darling, Alastair (8 October 2008). "Statement by the Chancellor on financial stability". HM treasury. Archived from the original on 11 October 2008. Retrieved 2008-10-09.
  10. "Central banks cut interest rates". BBC News. 2008-10-08. Archived from the original on 10 October 2008. Retrieved 2008-10-08.
  11. "Hansard". Hansard. 2008-10-06. Archived from the original on 12 October 2008. Retrieved 2008-10-10.
  12. Barker, Alex (2008-10-08). "Brown says UK leads world with rescue". Financial Times. Retrieved 2008-10-08.
  13. "Q&A: How will the UK bailout work?". CNN. 2008-10-08. Archived from the original on 8 October 2008. Retrieved 2008-10-08.
  14. Wearden, Graeme (2008-10-08). "Government to spend £50bn to part-nationalise UK's banks". The Guardian. Archived from the original on 9 October 2008. Retrieved 2008-10-08.
  15. Capital base of HSBC UK strengthened Archived 2008-11-20 at the Wayback Machine, 9 October 2008
  16. Standard Chartered welcomes UK Government announcement 8 October 2008
  17. "UK banks receive £37bn bail-out". BBC News Online. 13 October 2008. Archived from the original on 14 October 2008. Retrieved 2008-10-13.
  18. RBS Investor Relations (2008-10-13). "Royal Bank of Scotland Group PLC - Capital Raising". Archived from the original on October 16, 2008. Retrieved 2008-10-13.
  19. Thompson, Melissa (20 January 2009). "How toxic is YOUR bank?". Daily Mirror. Retrieved 15 February 2009.
  20. "Britain was hours from breakdown of law and order during GFC: Ex-chancellor". Stuff (Fairfax). 29 May 2018.
  21. "Gordon Does Good". The New York Times. 12 October 2008. Retrieved 5 February 2016.
  22. "Paul Krugman wins Nobel economics prize and praises Gordon Brown". The Telegraph. 13 October 2008. Retrieved 5 February 2016.
  23. https://www.theguardian.com/business/2018/sep/09/have-the-too-big-to-fail-banks-really-met-their-waterloo
  24. https://www.bbc.co.uk/news/business-33769906
  25. Equity Ownership Statistics, accessed 9 June 2018
  26. Agini, Samuel. "Government faces questions over £2bn hit on RBS share sale". Fnlondon.com. Retrieved 2018-09-07.
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