Credit Crunch

UK banks rescue package

The UK government has now announced a package of proposals that are aimed at rescuing the banking system. The plan will make around £400 billion of ‘fresh money’ available to fund the rescue.

The plan initially makes extra capital available to eight of the UK’s biggest banks and building societies in return for preference shares in them.

The rescue package is, “designed to put the British banking system on a sounder footing” said Prime Minister Gordon Brown.

Some banks shares rose after the news was announced although the main FTSE 100 index continued to fall. The cost of shares in HBOS ended up by 24.5% while Royal Bank of Scotland was 0.8% higher. Shares in Lloyds TSB fell by 7% and Barclays shares were down by 2.4%.

The key points of the rescue plan are:

Banks will need to increase their capital by at least £25bn and may borrow from the government to do so.

An additional £25bn in extra capital will be made available in exchange for shares.

£100bn will be available for short-term loans from the Bank of England.

As much as £250bn in loan guarantees will be available at a commercial rate to encourage banks to lend to each other.

To participate in the scheme, banks have to sign up to an FSA agreement regarding executive pay and dividends.