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The Telegraph: IMF calls on Darling to set up £100bn "toxic waste" fund before recapitalising banks
The U.K. government plans to announce early Wednesday one of the broadest bailouts in the global financial crisis, potentially injecting tens of billions of pounds into some of the country's largest financial institutions, people familiar with the matter said.
As part of the plan, the British government will offer to buy stakes in Royal Bank of Scotland Group PLC, Barclays PLC and soon-to-be-combined HBOS PLC and Lloyds TSB Group, and provide other assistance that could total as much as £50 billion ($87.9 billion).
The plan was hastily put together Tuesday, and it is not clear what the response from the banks will be. A person close to the matter said the banks will likely be briefed overnight on the terms. Treasury Chief Alistair Darling said late Tuesday an announcement would come before the markets open Wednesday.
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While the U.S. program is aimed at taking toxic assets off banks' balance sheets, the U.K. plan is aimed at boosting the banks' capital so they can restart the lending that is crucial to economic growth.
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The loan-to-deposit ratio among U.K. domestic banks is 143%, up from 105% in 2000, according to a recent Credit Suisse report. A report by Citigroup last month estimated that the six largest domestic U.K. banks -- including Barclays, RBS, HBOS and Lloyds -- depend on lending markets for a combined £542 billion.
Under the plan being discussed among Mr. Brown, the U.K. Treasury, the Bank of England and the markets regulator Financial Services Authority, the government may enhance deposit guarantees, people familiar with the plan said. Britain already raised its guarantee on consumer deposits to £50,000 from £35,000 but has no such protection for corporate deposits, which could be included.
The U.K. wants to keep deposits from flowing to countries such as Ireland and Germany that have moved to guarantee all deposits. European Union finance ministers also agreed Tuesday to raise minimum deposit insurance across the bloc.
Any U.K. capital injections would also likely be accompanied by new rules on the amount of capital banks must set aside to cover potential losses -- a requirement that could lower banks' profitability in the long term.
The government is trying to construct the deal so that all banks participate. If the structure is voluntary, some might opt out, leaving banks that participate with the stigma that they need the cash. That leaves open the possibility that banks will be forced to take some investment.
The government is likely to seek considerable protection from losses, possibly by buying stakes through preferred shares that rank above common stock, meaning the government would get paid dividends before other shareholders. The shares could pay the government a dividend of as much as 9%, a person familiar with the matter said. They may also be convertible into common equity, giving the government the chance to participate in any future share-price increases.
At least part of the investments could also be in common shares, but at prices well below where the banks' stocks traded only recently.
As part of the plan, the British government will offer to buy stakes in Royal Bank of Scotland Group PLC, Barclays PLC and soon-to-be-combined HBOS PLC and Lloyds TSB Group, and provide other assistance that could total as much as £50 billion ($87.9 billion).
The plan was hastily put together Tuesday, and it is not clear what the response from the banks will be. A person close to the matter said the banks will likely be briefed overnight on the terms. Treasury Chief Alistair Darling said late Tuesday an announcement would come before the markets open Wednesday.
[..]
While the U.S. program is aimed at taking toxic assets off banks' balance sheets, the U.K. plan is aimed at boosting the banks' capital so they can restart the lending that is crucial to economic growth.
[..]
The loan-to-deposit ratio among U.K. domestic banks is 143%, up from 105% in 2000, according to a recent Credit Suisse report. A report by Citigroup last month estimated that the six largest domestic U.K. banks -- including Barclays, RBS, HBOS and Lloyds -- depend on lending markets for a combined £542 billion.
Under the plan being discussed among Mr. Brown, the U.K. Treasury, the Bank of England and the markets regulator Financial Services Authority, the government may enhance deposit guarantees, people familiar with the plan said. Britain already raised its guarantee on consumer deposits to £50,000 from £35,000 but has no such protection for corporate deposits, which could be included.
The U.K. wants to keep deposits from flowing to countries such as Ireland and Germany that have moved to guarantee all deposits. European Union finance ministers also agreed Tuesday to raise minimum deposit insurance across the bloc.
Any U.K. capital injections would also likely be accompanied by new rules on the amount of capital banks must set aside to cover potential losses -- a requirement that could lower banks' profitability in the long term.
The government is trying to construct the deal so that all banks participate. If the structure is voluntary, some might opt out, leaving banks that participate with the stigma that they need the cash. That leaves open the possibility that banks will be forced to take some investment.
The government is likely to seek considerable protection from losses, possibly by buying stakes through preferred shares that rank above common stock, meaning the government would get paid dividends before other shareholders. The shares could pay the government a dividend of as much as 9%, a person familiar with the matter said. They may also be convertible into common equity, giving the government the chance to participate in any future share-price increases.
At least part of the investments could also be in common shares, but at prices well below where the banks' stocks traded only recently.
And yet that is merely one of the radical proposals the International Monetary Fund has prescribed in its Global Financial Stability Report.
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The IMF makes it clear both that such action is now necessary, and that before considering recapitalising banks the Chancellor and his fellow governments around the world must spend some $2 trillion in taxpayers' cash (£1.1 trillion) buying up the untradeable assets at the heart of the crisis.
This total includes US Treasury Secretary Hank Paulson's $700bn Troubled Asset Relief Program. It also assumes that the US will need to spend a further $300bn on top of this.
[..]
The IMF makes it clear both that such action is now necessary, and that before considering recapitalising banks the Chancellor and his fellow governments around the world must spend some $2 trillion in taxpayers' cash (£1.1 trillion) buying up the untradeable assets at the heart of the crisis.
This total includes US Treasury Secretary Hank Paulson's $700bn Troubled Asset Relief Program. It also assumes that the US will need to spend a further $300bn on top of this.
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