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News - 8 October 2008

£50bn bailout for UK banking system as interest rates are cut

The UK government has announced details of a rescue package for the banking system worth up to £50bn and cut interest rates by half a percentage point..

Initially the money will be available to eight of the UK's largest banks and building societies - Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide, Royal Bank of Scotland and Standard Chartered.

The details include: -

  • Banks will have to increase their capital by at least £25bn but in the face of reluctance of banks to lend to one another they can borrow from the government to do so.
  • An additional £25bn in extra capital will be available from the government in exchange for preference shares in the banks which pay a fixed rate of interest instead of a dividend. This has to be paid before other shareholders receive anything but they do not give voting rights to the holder.
  • £200bn will be available in short-term loans from the Bank of England, double the amount already pledged
  • Up to £250bn will be available at commercial rates to guarantee loans made between banks to encourage them to return to lending to each other.
  • To participate in the scheme banks will have to sign up to an FSA agreement on executive pay and dividends.

Much of the current crisis has been caused by the unwillingness of banks to lend to each other, so the government hopes that if those loans can be guaranteed then lending will resume. It is hoped that the deal will get the money markets going again and restore confidence in the banking system.

Meanwhile six central banks - including the Bank of England - have cut their interest rates. In the UK the interest rate is now 4.5%, down from from 5%.

The US Federal Reserve, European Central Bank (ECB) and the central banks of Canada, Sweden and Switzerland all reduced rates at the same time in an effort to steady a faltering global economy and slumping stock markets.


Read related items on:
Interest Rate
Recession
Bank of England


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