2008 United Kingdom bank rescue package

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Alistair Darling, Chancellor of the Exchequer.

A bank rescue package totalling some 500 billion (approximately $850 billion) was announced by the British government on 8 October 2008, as a response to the ongoing global financial crisis. After two unsteady weeks at the end of September, the first week of October had seen major falls in thestock market and severe worries about the stability of British banks. The plan aimed to restore market confidence and help stabilise the British banking system, and provided for a range of short-term loans and guarantees of interbank lending, as well as up to 50 billion of state investment in the banks themselves.
Contents
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1 Background 2 The rescue plan 2.1 Capital investment 3 Participating banks 4 Reaction to bail-out 5 See also 6 References

7 External links

[edit]Background

The announcement occurred less than 48 hours after Britain's leading share index, the FTSE100, recorded its largest single-day points fall since 1987.[1] A similar bailout package had been passed in the United States the previous week, as the Emergency Economic Stabilization Act of 2008. Details of the rescue package were worked on overnight and were finalised at 05:00. [edit]The

rescue plan

The plan provides for several sources of funding to be made available, to an aggregate total of 500 billion in loans and guarantees. Most simply, 200 billion will be made available for short terms loans through the Bank of England's Special Liquidity Scheme. Secondly, the Government will support British banks in their plan to increase their market capitalisation through the newly formed Bank Recapitalisation Fund, by 25 billion in the first instance with a further 25 billion to be called upon if needed. Thirdly, the Government will temporarily underwrite any eligible lending between British banks, giving a loan guarantee of around 250 billion. [2] However, only 400 billion of this is 'fresh money', as there is already in place a system for short term loans to the value of 100 billion.[3]

Alistair Darling, the Chancellor of the Exchequer, told the House of Commons in a statement on 8 October 2008 that the proposals were "designed to restore confidence in the banking system", and that the funding would "put the banks on a stronger footing".[4] Prime Minister Gordon Brown suggested that the government's actions had 'led the way' for other nations to follow whilst Shadow Chancellor George Osborne stated that "This is the final chapter of the age of irresponsibility and its absolutely extraordinary that a government has been driven by events to today's announcement"; in addition to offering opposition support for the plan.[5]

Also on the 8 October 2008 there was a strategic and co-ordinated global effort by seven central banks to calm the current financial crisis, by cutting interest rates by 0.5%. The banks where all members of the OECD and included The Bank of England, The European Central Bank and the U.S Federal reserve along with central banks in China, Switzerland, Canada and Sweden. In a reaction to the move, European stock exchanges began to recover from the losses they had made after trading had opened. The decision to make the cut came after exchanges in the Far East closed on a day of heavy losses.

The British rescue plan differs from the $700bn US bailout formally entitled the Troubled Asset Relief Program (TARP), in that the 50bn being invested by the UK Government will see them purchasing shares in the banks (which in the future could see a return being made to the taxpayer), whereas the American program is primarily devoted to the U.S. government purchasing the mortgage backed securities of the American banks which are not able to be sold in the secondary mortgage securities market. The U.S. program does require the U.S. government to take an equity interest in financial organisations selling their securities into the TARP[6] The U.S. programme therefore does not address the fundamental solvency problem faced by the banking sector, but rather is aimed at tackling the immediate funding shortfall; the UK package tackles both solvency, through the 50bn recapitalisation plan, and funding, through the government guarantee for banks' debt issuances and the expansion of the Bank of England's Special Liquidity Scheme. [edit]Capital

investment

Through the Bank Recapitalisation Fund, the government will buy a combination of ordinary shares and preference shares in affected banks. The amount and proportion of the stake that will be taken in any one bank is to be negotiated with the individual bank. Banks that take the rescue packages will have restrictions on executive pay and dividends to existing shareholders, as well as a mandate to offer reasonable credit to homeowners and small businesses.[3] The long-term government plan is to offset the cost of this program by receiving dividends from these shares,
[2]

and in the long run, to sell the shares after a market recovery.[3] This plan may potentially extend to underwriting new issues of shares by any

participating bank.[2] The plan has been characterised as, in effect, partial nationalisation.[7]

The extent to which different banks participate will vary according to their needs. HSBC Group issued a statement announcing it was injecting 750 m of capital into the UK bank and therefore has "no plans to utilise the UK government's recapitalisation initiative ... [as] the Group remains one of the most strongly capitalised and liquid banks in the world".[8] Standard Chartered also declared its support for the scheme but its intention not to

participate in the capital injection element. [9] Barclays intends to raise 6.5 billion from private investors, and will cancel its final dividend for the year for a net saving of 2 billion.[10]

The Royal Bank of Scotland Group will raise 20 billion from the Bank Recapitalisation Fund, with 5 billion in preference shares and a further 15 billion being issued as ordinary shares.[11] HBOS and Lloyds TSB will together raise 17 billion, 8.5 billion in preference shares and a further 8.5 billion issue of ordinary shares. The Fund will purchase the preference shares outright, for a total 13.5 billion investment, and will underwrite the issues of ordinary shares; should they not be taken up by private investors, the Fund will undertake to purchase them. If none of the new stock is taken up, this would give the Government an overall holding of 60% of the Royal Bank of Scotland, with 40% of the merged HBOS-Lloyds, held as a mixture of preference and ordinary stock.[10] [edit]Participating

banks

The plan is open to all UK incorporated banks and all building societies, including the following:[3]

Abbey Barclays plc HBOS HSBC / HSBC Group Lloyds TSB Nationwide Building Society Royal Bank of Scotland / Royal Bank of Scotland Group Standard Chartered Bank

However, of these, Abbey, Barclays, HSBC, Nationwide, and Standard Chartered have chosen not to receive any government money,[12] leaving Lloyds and RBS as the only major recipients. [edit]Reaction

to bail-out

Paul Krugman the Nobel Prize winner for Economics stated in his New York Times column that "Mr Brown and Alistair Darling, the chancellor of the Exchequer have defined the character of the worldwide rescue effort, with other wealthy nations playing catch-up." He also stated that "Luckily for the world economy,... Gordon Brown and his officials are making sense,... And they may have shown us the way through this crisis."

The British Banking Bail-Out example is due to be followed by the rest of Europe as well as the U.S Government who on the 14 October announced a $250bn (143bn) plan to purchase stakes in a wide variety of banks in an effort to restore confidence in the sector. The money will come from the $700bn bail-out package approved by US lawmakers earlier that month.

A wave of international action to address the financial crisis has at last had an effect on stock markets around the world. Although shares in the affected banks fell, the Dow Jones was up by more than 900 points, or 11.1 per cent, while London shares also bounced back, with the FTSE100 Index closing more than 8 per cent higher on the 13 October. [edit]See

also

Government intervention due to subprime crisis 2009 United Kingdom bank rescue package List of banks in the United Kingdom

[edit]References

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

[edit]External

^ "Stocks slide despite reassurances". BBC News. 2008-10-06. Retrieved 2008-10-08. ^ a b c Darling, Alastair (8 October 2008). "Statement by the Chancellor on financial stability" (in English). HM treasury. Retrieved 2008-10-09. ^ a b c d "Central banks cut interest rates". BBC News. 2008-10-08. Retrieved 2008-10-08. ^ "Hansard". Hansard. 2008-10-06. Retrieved 2008-10-10. ^ Barker, Alex (2008-10-08). "Brown says UK leads world with rescue". Financial Times. Retrieved 2008-10-08. ^ "Q&A: How will the UK bailout work?". CNN. 2008-10-08. Retrieved 2008-10-08. ^ Wearden, Graeme (2008-10-08). "Government to spend 50bn to part-nationalise UK's banks". The Guardian. Retrieved 2008-10-08. ^ Capital base of HSBC UK strengthened, 9 October 2008 ^ Standard Chartered welcomes UK Government announcement 8 October 2008 ^ a b "UK banks receive 37bn bail-out". BBC News Online. 13 October 2008. Retrieved 2008-10-13. ^ RBS Investor Relations (2008-10-13). "Royal Bank of Scotland Group PLC - Capital Raising". Retrieved 2008-10-13. ^ Thompson, Melissa (20 January 2009). "How toxic is YOUR bank?". Daily Mirror. Retrieved 15 February 2009.

links

vde

HM Treasury Press Notice 100/08 Financial support to the banking industry

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Stimulus and recovery

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Government bailouts and takeovers

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Company acquisitions

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Alleged frauds and fraudsters

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Proven or admitted frauds and fraudsters

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Related entities

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Securities involved and financial markets

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The affordability of housing in the United Kingdom deteriorated significantly from the late 1990s onwards, with house prices risings faster than earnings and the average age of first-time homebuyers increasing. The issue of housing supply and affordability was recognised as a social, economic and political problem and generated a number of Government responses.[1]
Contents
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o o o

1 Growth of house prices 1.1 Mortgage lending 2 Barker Report 3 See also 4 References 5 External links 5.1 Government Reports/Responses

5.2 Other

[edit]Growth

of house prices

UK house prices 1975-2009 (adjusted for inflation). Source: Nationwide Building Society

Between 1998 and 2007 house prices in the United Kingdom rose dramatically, generating large increases in home equity for many homeowners but also making housing unaffordable for other people.[2]Most developed countries experienced sharp increases in house prices in the early years of the new millennium. The UK situation was different in two regards. First, the house price boom started earlier and saw more sustained increases. Second,

the regional pattern was fairly uniform.[2] Between 2002 and 2007, house prices in the UK rose by 90%, faster than any Eurozone nation except Spain.
[3]

The average (mix-adjusted) house price in the first quarter of 1998 was 81,722, but at the peak of the market in the third quarter of 2007 the average price was 219,256 over two and a half times higher or a total increase of 168%.[2] Between the first quarter of 2001 and the fourth quarter of 2006 prices increased 60%, again when adjusted for inflation (figures from the Nationwide Building Society's house price data[4]). House prices at the end of 2006 were 35% higher than they would have been if the long-term trend rate of growth - 2.6% per annum in real terms since 1976 - had been maintained. In 2008, house prices started to fall but they have stabilised as of August 2009.[2] This may reflect the housing market's normal seasonality or it may indicate a genuine recovery.[2] Some analysts now expect UK house prices to contract by 50% in real terms.[5] Adam Slater, senior economist at Oxford Economics has forecast that "it will take quite a few years, possibly a decade, before real house prices get back to their peak levels.[6]

The increase in the house prices has made the housing market increasingly difficult to enter. The ratio of lower-quartile house prices to lower-quartile earnings, a measure of affordability used in the Barker Review of Housing Supply, rose from 4 in 2000 to 5.2 in 2003 and 7.1 in 2006.[7] At a regional level, the problem of unaffordable housing is no longer confined to London and the South East, but now affects almost the whole of England.[7] In July 2009 the ratio of house prices to first-time buyers' incomes remained higher than the historical average.[8] [edit]Mortgage

lending

During the period 2001-2007, many lenders began offering loans of increasing multiples of income[9] sometimes to people with poor credit ratings; products that did not require a deposit became more common- 125% mortgage products appeared. The high rate of lending may have been exacerbated by the buy-to-let phenomenon. In the 1990s the Buy-to-Let market accounted for about 1% of loans taken out for the purposes of buying a house. In 2006, the 330,000 buy-to-let mortgages that were taken out accounted for 9% of outstanding home loans[10].

Although mortgages were more widely available, the rise in house prices meant that there was less affordable housing available to people on low incomes[11]. The Joseph Rowntree Foundation reported what it called "alarming trends in housing supply, availability and affordability" [12]. In 2003, the British Government commissioned a report on the lack of supply in the housing market. The Barker Report on housing supply concluded that it was necessary to build an additional 70,000 houses per year to reduce the real price rise to 1.8% per annum. An additional 120,000 houses per annum was required to reduce long term house price inflation to the EU average of 1.1%. The government commissioned a further report by Professor David Miles of Imperial College on the mortgage market. Among its recommendations was that Building Societies should obtain more mortgage funds from the money market in order to increase the availability of mortgages[13].

The Barker report had also concluded that an additional 39,000 houses per annum were required for UK house building to match household formation[14]. Barker was quoted as saying there were only a net 134,000 new houses for more than 179,000 household formations per year[15]. The figure of 134,000 built in 2002 was contradicted by the National House-Builder Council[16] which reported that there were 160,800 houses built in 2002. In 2006 they report 185,000 new builds, which is above the original Barker report estimate of 179,000 household formations a year. In the 1990s, an average of 158,910 houses were built each year (NHBC figures) against 172,000 for each of the five years to 2006.

Increased divorce rate is another often quoted reason for increasing house prices, but this metric peaked in 1993 [17] - a year of static or falling prices.

The reduced availability of inter-bank lending had a severe effect on companies such as Northern Rock which had financed an aggressive expansion of mortgage lending by short term borrowing in the money market[18]. [edit]Barker

Report

See also: Barker Review of Housing Supply In Budget 2003, the Government asked Kate Barker, a member of the Monetary Policy Committee, to undertake a review of housing supply in the UK. Barkers interim report was published on 10 December 2003. She found that the number of houses being built in the UK was not keeping pace with demand. In 2001, around 175,000 dwellings were built in the UK the lowest level since the Second World War. Over the prior 30 years, UK house prices went up by 2.4% a year in real terms compared to the European average of 1.1%. As a result of these price rises first-time buyers in 2001 paid on average 32,000 more for their homes. In 2002, only 37% of new households in England could afford to buy a house, compared to 46% in the late 1980s.[19]

Barker considered a range of factors that might be constraining the supply of housing in the UK. She identified the main constraint as land supply and the housebuilding industry's response to risk, which leads to reluctance to build out large sites quickly. The regulatory relationship and control over the use of land also influences the way in which land is made available for development.[19]

The Barker Reviews final report set out a range of policy recommendations for improving the functioning of the housing market:[20]

Government should set out a goal for improved market affordability; additional investment to deliver additional social housing; a Planning-gain Supplement to ensure that local communities share in the value of development; a Regional Planning Executive to provide advice on the scale and distribution of housing required; allocation of additional land in Local Development Frameworks; a Community Infrastructure Fund to help to unlock barriers to development; and Local authorities should be allowed to keep the council tax receipts from new housing developments for a period of time.

In response to the issue of housing affordability highlighted in the Barker Report the Department for Communities and Local Government created a non-departmental public body, the National Housing and Planning Advice Unit, to provide advice to the Government, Regional Assemblies and other stakeholders.[21] The Unit's initial report, Affordability Matters (published in June 2007) argued that there are strong reasons to promote affordability deteriorating affordability is associated with house price volatility, the diversion of investment from more productive areas of the economy, reduced labour market flexibility, and a poorer standard of liv