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'Most extraordinary day' in banking

Catherine Deshayes

As the global economic woes continue to sweep the globe, the Government is set to inject up to £37 billion of taxpayer's cash into Royal Bank of Scotland (RBS) Lloyds TSB and HBOS...

It's one of the biggest nationalisation projects since the second world war and means the Government will become a major or even majority shareholder in some of Britain's biggest high street names.

BBC Business Editor Robert Peston has termed the announcement of the scheme the ‘most extraordinary day in British banking history.'

This new Treasury cash injection forms part of the mammoth Government rescue plan announced last week, and the banks have now announced what they will take from the bail-out money pot.

The Government will take a controlling stake of up to 60 per cent in RBS, in return for up to £20 billion from the taxpayer. Seventeen billion pounds is to be put into HBOS and Lloyds TSB, and Barclays plans to raise £6.5 billion without any Government help, relying on private investors instead.

Barclays has said that an existing shareholder is interested in taking up around £1 billion of shares, but if they are unable to attract the private investors, which some think is likely, the Government may also yet face a cash call from Barclays.

HBOS will raise £11.5 billion from taxpayers, made up of £8.5 billion in ordinary shares and £3 billion in preference shares, while Lloyds TSB is to get £5.5 billion.

This latest bailout is an attempt to prevent the UK's banking sector from melting down, and the part nationalization of three main banks will mean that taxpayers will own around 60 per cent of RBS and 40 per cent of the merged Lloyds TSB and HBOS.

Bank bosses have had any hope of bonuses removed for this year, with Gordon Brown saying, "The Government would no longer tolerate ‘rewards for failure.' Shareholder dividends will also be frozen.

RBS' Chief Executive Fred Goodwin announced that he was quitting with immediate effect to be replaced by British Land boss Stephen Hester. RBS Chairman Tom McKillop is to retire.

HBOS Chief Executive Andy Hornby and Chairman Lord Dennis Stevenson also said that they would both stand down from their roles.  

RBS and Lloyds TSB/HBOS will return mortgage and small-business lending to 2007 levels, which is much more than they are currently lending.

The other developments included major central banks saying they would offer financial institutions an unlimited amount of short-term loans.

Prime Minister Gordon Brown said the bail-out would act as a ‘rock of stability' that ‘other Governments would soon copy.' He also said that the move was ‘unprecedented but essential for all of us,' and would ‘thaw frozen money markets.' He added that the Government ‘would not be a permanent investor' in UK banks.

Chancellor Alistair Darling said, "I'm determined to do everything we can to stabilise our banking system and make it stronger.

"In return for it, of course, there will be restrictions on what happens in boardroom pay and we're also getting guarantees in relation to increased lending to businesses, as well as to mortgages too," Mr Darling added.

The Government investment is dependent upon the banks being forced to continue offering and marketing competitively-priced loans to homeowners and small businesses at 2007 levels.

The banks must also continue to offer support schemes to help struggling homeowners make their mortgage payments and remain in their homes, as well as support the expansion of financial capability initiatives.

What are other countries doing?

Germany and Italy are expected to follow suit and take measures to shore up their banks, with some experts predicting that the German plan could be worth as much as £317 million.

Australia and New Zealand have already guaranteed all bank deposits and Indonesia upped its guarantee to £79,000.

India pledged more liquidity to help financial markets.

MSN Money offers the following advice on what the bailout means for you.

What does it mean for savers?
It has already been announced that the first £50,000 of money deposited in each separately registered UK bank was guaranteed, and with the Government pledging no private saver in Icesave would lose out either, there was effectively a full guarantee of savings in place anyway. So this move will have little effect on savers.

What does it mean for borrowers?
When the Government took stakes in the banks, one of its key objectives was making borrowing easier again. For more than a year the credit crunch has meant mortgages and loans have gone up in price, hopefully with the Government in charge, or at least with a say in banks' policies, things should become cheaper again.

Will this mean the banks are safe?
The Government backing means the banks are safer, a lot safer, but in the current market nothing can be guaranteed. It would take something major to push a Government-backed bank to the wall, but then we have seen several major crises hit the market in the last few weeks that no one saw coming a few months back.

Will it affect my mortgage payments?
Mortgage rates should fall if this scheme goes as planned and people should have an easier time securing a deal.

Will this help the property market?
The Government has said offering mortgages to Britons is a priority, and this should hopefully act as a spur to the property market. However, access to mortgages is only one of the things holding back the property market right now - the others being sellers unwilling to drop their prices and buyers unwilling to buy in a falling market. Only time will tell if these improve.

Are the banks now the property of the government?
No, the Government has put money up for grabs to help sure-up the banks' balance sheets. In return it is getting a share of the banks and a say in how they are run. It will not own them outright, and will not run them as a section of the Government. Gordon Brown has also said this move is not permanent, and the government will look to sell the shares it has bought back to the private sector as soon as is realistic.

Is this a good use for taxpayers' money?
Provided the banks pay the money back and do not go bust, there is no taxpayer money at risk. In fact, the government could make a very large profit on this deal. However, if the banks do go under, potentially all this money is at risk.

Where's the money coming from?
In the short-term, the Government will simply have to borrow the cash. This will eventually cost the Treasury more in interest payments and will mean either the government has to spend less on services or increase taxes. However, the money is not being frittered away: the stake the Government takes in the banks will earn dividends (a share of the banks' profits) and can be sold - potentially for a big profit.

What does this mean for shareholders?
Shareholders will see their stake in the banks diluted, at least in the short term. However, this is a better result than the bank becoming insolvent or being nationalised - as was the case for Northern Rock and Bradford & Bingley.

Ultimately, if this move helps the banks, share prices could rise again - making this a potentially good move for shareholders. Additionally, if the shares the government buts are bought back by the banks themselves, shareholders will ultimately have their share in the banks restored.

Picture by danzo08