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Britain Announces Huge Bank Bailout

Posted by Yogesh on Thursday, 9 October, 2008

LONDON — Britain on Wednesday announced a rescue package for its beleaguered banks, which the prime minister described as more extensive than America’s bailout plan and which could leave the country’s top lenders partly owned by the government.

Britain’s government offered banks like Royal Bank of Scotland, Barclays and HSBC Holdings up to £50 billion, or $87 billion, to shore up their capital in exchange for preference shares. It will also provide a guarantee of about £250 billion to help banks refinance debt and the Bank of England will double the amount it lends to banks under the special liquidity scheme to £200 billion.

“This is not a time for outdated thinking,” Prime Minister Gordon Brown said Wednesday. “We had to do more than just buy up assets.”

The package, mainly put together in the last 48 hours, was intended to restore trust in British banks that saw billions of pounds wiped off their market values. Its aim is to allow banks to again lend to each other and as a result to consumers and companies to try and prevent a dramatic downturn. Executives, investors and lawmakers welcomed the package as a first step to stabilize the banking system.

“Anything that’s at least trying to unblock the global credit markets has to be seen as a positive step,” said Guy de Blonay, a fund manager at New Star Asset Management in London. “It looks like it’s going to be slightly more effective than to have a bailout fund.”

British banks eligible under the rescue scheme must increase their capital ratios to be better equipped to cope with a possible further decline of the value of their assets, the government said. Most banks said they planned to adhere to the new requirement and welcomed the government intervention but stopped short of saying they will make use of the offer to exchange preferred shares for capital. HSBC said it “has no current plans to utilize the U.K. recapitalization initiative.”

Banks may be reluctant to use the program unless absolutely necessary to avoid government intervention, some analysts said. Prime Minister Brown said banks would continue to be run by their management but that the government would have to be “satisfied” with executive compensation, dividend payments and the lending activities.

Mr. Brown said there would be “strings attached and conditions to be met” by the banks as the government expects taxpayers to be “rewarded for the support we provide.”

“This is not the American plan,” he said. “Our plan is to buy shares in the banks themselves and therefore we will have a stake in the banks. We are not simply giving money.”

With the plan, Prime Minister Brown hopes to avoid turning a decadelong British banking boom, which he helped to create as chancellor of the Exchequer, into a bust. Philip Isherwood, head of equity strategy at Dresdner Kleinwort in London, said the initiative was “sensible because it’s trying to deal with the capital side of things.”

“Banks needed more permanent capital,” Mr. Isherwood said. “You can’t run a big financial institution on overnight financing.”

Questions remained about how much capital each bank can get. The government did not offer details about how it will ensure taxpayers’ money can be recouped and some analysts raised concerns about creating an uneven playing field in Europe.

“Assuming the U.K. plan becomes the norm, European banks outside of the U.K. could be asked to raise between 70 billion euros and 130 billion euros in capital,” said Vasco Moreno, an analyst at Keefe, Bruyette & Woods in London. “European banks likely can’t raise these amounts from private investors in the current environment so governments would probably have to inject capital into these banks.”

Mr. Darling rejected criticism from some executives and business leaders that the government let British banking stocks collapse while it delayed in coming up with a rescue plan. Pointing toward the United States, where a plan was rushed in front of Congress, he said Britain preferred to consider its options.

“It takes time to get the thing right,” he said.

The announcement of the plan coincided with an emergency interest rate cut by the Federal Reserve, the European Central Bank, the Bank of England and three other central banks intended to ease pressure on the economy by lowering interest rates.

Shares in British banks, including Royal Bank of Scotland and Barclays, fell early on Wednesday, reflecting the fear that a government capital injection would dilute existing shareholders, but they rebounded after the interest rate cuts.

The British initiative came as signs of European economic weakness deepened, and as Iceland, whose troubles are mounting from the global credit crisis, warned that it was working to avoid tumbling into all-out bankruptcy.

European leaders continued to clash over measures to ease the financial crisis. Chancellor Angela Merkel of Germany opposes paying into a joint European Union fund to rescue banks. In Spain, where a shakeout in the housing market has hit the banking industry hard, Prime Minister José Luis Rodríguez Zapatero announced he would create a 30 billion euro fund to buy assets from the nation’s banks to try to grease the wheels of lending. The fund could be raised to 50 billion euros and will buy only healthy, not impaired, assets, he said, raising questions about how useful it would be for banks laden with subprime-tainted loans.

Iceland decided to take over two of the country’s largest banks and Germany, Ireland and Greece are among countries that promised to guarantee consumers’ deposits.

Landon Thomas Jr. contributed reporting from London and Carter Dougherty from Frankfurt.Source NYTimes.com

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