Darling props up banks with £50bn

Wednesday, 08 October 2008 07:33

The government is to pump £50 billion into UK banks in a bid to stop the banking crisis and guarantee interbank lending up to £250 billion.

In exchange for the £50 billion, the UK government will take a stake in any UK bank in the form of preferred shares for those wishing extra capital.

Banks that choose to take up the deal will face restrictions on dividend payouts and caps on pay at the head of the company.

Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland and Standard Chartered have all agreed to increase their capital base - either by turning to the markets or through the government's £50 billion offer.

The Bank of England is now to provide at least £200 billion to banks under the Special Liquidity Scheme (SLS) - doubling the size of the scheme - where loan-backed assets are swapped for Treasury bonds.

The government is also to guarantee interbank loans up to the value for £250 billion.

It is hoped with the backing of the government, interbank lending will restart, as firms will see institutions backed and guaranteed by the state.

From this point at the top of the finance tree it is hoped lending on the high street will be spurred.

The deal was brokered after meetings Monday and Tuesday night at Downing Street between bank chiefs, the chancellor, Gordon Brown, and Mervyn King.

Officials are reported to have been working on the plan through the night.

The deal came after a day of massive falls in bank share prices, as traders expected the government move that will dilute the share values.

A turbulent day on the financial markets saw 39 per cent wiped off the value of Royal Bank of Scotland, nine per cent off the value of Barclays Bank and 13 per cent wiped off the value of Lloyds TSB - which itself only stepped in to save HBOS a fortnight ago.

HBOS suffered a further 40 per cent drop in its share price despite its proposed merger with Lloyds.

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