Britain details 'exemplary' bank rescue scheme (Roundup)

Oct 13, 2008, 11:15 GMT

Chancelor of the Exchequor, Alistair Darling, leaves 10 Downing Street in London, Britain, 13 October 2008. The British government announced 13 October is to inject up to 47bn euros of taxpayer cash into Royal Bank of Scotland (RBS), Lloyds TSB and HBOS. EPA/ANDY RAIN

London - The British government Monday implemented a bank rescue scheme on an unprecedented scale by injecting 37 billion pounds (65 billion dollars) into ailing banks in a move resulting in partial nationalization and an increased concentration in the banking sector.

Prime Minister Gordon Brown said the 'far-reaching' measures were aimed at rebuilding confidence and trust in British banks and warned that the recipients of state aid would have to comply with conditions that would bring an end to a 'rewards for failure' culture.

'I believe that only by global action can we fully restore the confidence needed to build the international financial order,' said Brown.

'This is perhaps the first government to do what I believe a large number of governments are going to do over the next few days,' said Brown, following consultations with European Union (EU) leaders, US President George W Bush and the World Bank and International Monetary Fund (IMF) over the weekend.

The package, which will see the British government taking significant ownership in the Royal Bank of Scotland (RBS) and a merged Lloyds TSB and Halifax Bank of Scotland (HBOS), comes with the proviso of no bonuses for the executives of banks that receive public funds.

The government has also made 200 billion pounds available in short-term loans from the Bank of England and offered up to 250 billion pounds in loan guarantees for inter-bank lending, to be granted at commercial rates.

The total amount set aside for bank recapitalization in the package was 50 billion pounds.

Speaking to the press after details of the bail-out were announced before markets opened Monday, Brown said there would be no more 'incentives for irresponsibility,' and that future rewards in banks rescued by public funds would be based on performance and the creation of long term value.

'We are showing today that we are willing to invest assets our country has to strengthen the banking system,' said Brown. Not to act would have been a 'failure of leadership.'

He believed that governments across the world were now ready to do 'whatever it takes' to stabilize the banking system and to 'help us deal with the uncertainty and turbulence.'

Under the plan, agreed in principle last week, the Royal Bank of Scotland (RBS) will receive 20 billion pounds of new capital, giving the government a 60-per-cent share in the Edinburgh-based bank.

The chief executive of RBS, Fred Goodwin, has agreed to stand down as part of the deal, after the bank's share plunged to 1.71 pence at the end of last week. He will be replaced by former investment banker Stephen Hester, RBS announced.

RBS, which was widely seen as having 'overreached' itself with a 12-billion-pound takeover of Dutch giant ABN Amro last year, will raise 5 billion pounds directly under the government's bail-out plan, while 15 billion pounds will be raised through issuing new shares.

It was also announced that Lloyds TSB, which is to raise its capital by 5.5 billion pounds, is to renegotiate its agreed takeover deal with HBOS.

Lloyds said it would offer 0.605 pence per HBOS share, as opposed to the 0.83 pence agreed when the takeover was agreed last month.

HBOS is to raise 11.3 billion pounds, giving the government a 40- per-cent stake once it has merged with Lloyds TSB, creating a new 'superbank' in Britain and cutting the number of top High Street banks to four.

Barclays said it would not draw on the government funds and raise 6.5 billion pounds from shareholders. HSBC has also made its own provisions to stock up capital.

Banks and Treasury officials worked through the night to hammer out details of the government aid to banks following the major bail- out package agreed last week.

Brown insisted Monday that the injection of government cash into the banks did not amount to nationalization.

'This is not standard public ownership. This is the government buying shares, allowing the banks to be run commercially, making sure that we can encourage other investors into the banking system,' said Brown.

Experts have estimated that the government package, totalling 500 billion pounds, will more than double planned public borrowing this year, pushing public sector net borrowing close to 100 billion pounds - or more than 6 per cent of national income.

Total annual public spending in Britain currently stands at 618 billion pounds.