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Sunday, 22 November 2009

Newsroom

The banking support measures in detail

  • Published: Monday, 13 October 2008

The government is implementing the measures announced last week, to make commercial investments in British banks and building societies to put them back in a sound position and support the long term strength of the banking sector and wider economy., depositors, businesses and borrowers; and to safeguard the interests of the taxpayer.

These actions will also help to build confidence and security in the banking system and provide greater protection for consumers. Customers can continue to use all of their banking facilities in the normal way.

By providing banks with increased levels of capital - through the purchase of shares - and by introducing a guarantee scheme to encourage lending between banks, these actions will restore confidence in the banking system and ensure banks are more willing to lend to individuals and businesses. Because the agreements the government has made with banks will be priced on commercial terms, taxpayers will be rewarded for providing this support to the banking system.

The essentials of the package

The measures intend to:

  • provide sufficient liquidity in the short term
  • make available new tier 1 capital to UK banks and building societies to strengthen their resources permitting them to restructure their finances while maintaining their support for the real economy, through the recapitalisation scheme which has been made available to eligible institutions
  • ensure that the banking system has the funds necessary to maintain lending in the medium term through the credit guarantee scheme available to eligible institutions in relation to new short and medium term debt issuance.
    The authorities have continued their detailed discussions with the institutions who confirmed their participation in the recapitalisation scheme last week. These institutions committed to increase their total tier 1 capital, either through their own actions or, where requested, through support from the government's recapitalisation scheme in the form of preference and ordinary share capital.

The government is making capital investments in RBS, and upon successful merger, HBOS and Lloyds TSB, totaling £37 billion.

Following the completion of these capital investments, each of the above institutions will have a tier 1 capital ratio in excess of 9%, well above international minimum standards and at a level that should put them on a strong footing for the future.

All participating institutions are eligible to take advantage of the government's credit guarantee scheme. The Debt Management Office is today announcing the general arrangements for operating the scheme.

As part of its investment, the government has agreed with the banks supported by the recapitalisation scheme a range of commitments covering:

  • maintaining, over the next three years, the availability and active marketing of competitively-priced lending to homeowners and to small businesses at 2007 levels
  • support for schemes to help people struggling with mortgage payments to stay in their homes, and to support the expansion of financial capability initiatives
  • remuneration of senior executives - both for 2008 (when the government expects no cash bonuses to be paid to board members) and for remuneration policy going forward (where incentive schemes will be reviewed and linked to long-term value creation, taking account of risk; and restricting the potential for 'rewards for failure')
  • the right for the government to agree with boards the appointment of new independent non-executive directors
  • dividend policy.

The recapitalisations are designed to enable participating banks to achieve prudent but efficient capital structures. The government intends to create a new arms length body to manage the government's shareholdings in recapitalised institutions on a professional and wholly commercial basis, and seek to effectively realise value to the taxpayer. Transparent arrangements will be put in place to ensure that any role for the government in relation to investment decision-making is clearly defined.

The government is not a permanent investor in UK banks. Its intention, over time, is to dispose of all the investments it is making as part of this scheme in an orderly way. To reflect the implementation of the scheme, the government will tomorrow announce a revised debt remit for the Debt Management Office.

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