By Landon Thomas Jr.
Sunday, January 18, 2009
LONDON: The British government on Monday will announce a package of measures to encourage bank lending, Prime Minister Gordon Brown said Sunday.
Brown spoke in Egypt, where he was attending a meeting on Gaza.
Unlike an earlier £37 billion, or $54.5 billion, program that used taxpayer funds to take stakes in troubled British banking institutions, the plan to be announced Monday will have the government, for a fee, insure the troubled assets on bank balance sheets up to a certain level, people briefed on the planning said Sunday.
Seen as a quicker route to get banks to start lending again - as opposed to the creation of separate so-called bad bank to acquire and manage distressed assets - the plan would also allow banks to identify their worst-performing, subprime-mortgage-related assets, while also keeping the taxpayer's exposure limited.
The emerging government strategy follows from weeks of criticism that the original plan this autumn had not done enough to stimulate bank lending in the face of a rapidly deteriorating economy - by some estimates the worst among developed nations.
The increased urgency also comes in the wake of another terrible week for British bank shares as fears grow worldwide that banks will be hit with larger write-downs and face the possibility of nationalization.
In the United States, the stocks of Citigroup and Bank of America hit historic lows last week as investors recoiled in shock at the size of bank losses and the prospect that the government would be required to take larger stakes in troubled financial institutions.
In Britain, Barclays shares plunged almost 25 percent on Friday as speculation swirled among traders and short-sellers that the bank would take a large write-off and that its chief executive, John Varley, and its president, Robert Diamond Jr., would be removed.
The stock's plunge prompted the board of Barclays to take the highly unusual action of issuing an evening statement on Friday, in effect preannouncing the bank's year-end 2008 results, by stating that Barclays expected to report a pretax profit that was "well ahead" of the £5.3 billion estimate of analysts, even after taking into consideration write-downs and other costs.
Barclays is scheduled to announce its full year results on Feb. 17. A spokesman for Barclays said there was no truth to the speculation that its top executives would leave.
Many market analysts have blamed last week's expiry of the government-imposed ban on short-selling of financial shares to have contributed to the loss of investor confidence. Short-sellers bet on a stock's decline.
HSBC has been widely hailed to have escaped the worst of the financial crisis. But its stock slid after a Morgan Stanley report said HSBC would have to raise as much as $30 billion in new capital and cut its dividend because of the worsening economic climate and its thin capital base. HSBC had in the past said its capital position was strong and had declined to comment on speculation that it needed to raise more money.
While Barclays and HSBC may have attracted the attention of short-sellers, weaker banks like the Royal Bank of Scotland and HBOS are expected to make the most use of the government's insurance plan, given expectations of their growing losses. Analysts say that they expect the government's plan to cover as much as £200 billion in distressed assets and that it will be supplemented by a swap program that would increase the government's stake in banks like Royal Bank of Scotland while decreasing the high interest rates that banks are now paying on their preferred government-held shares.
The British government already owns close to 60 percent of Royal Bank of Scotland. Its stake could grow under the new initiative.
The government, facing a growing pressure to take urgent action to stem the British economy's slide, has been increasing its public criticism of laggardly bank lending. The government hopes that the insurance plan will free bank capital to be directed toward the economy. At the same time, the Conservative opposition has scored points against the Labour Party with longstanding criticism that Brown's original bank plan was inadequate.
With the 2010 deadline for a general election looming large, the extent to which Brown's latest bank plan is perceived as successful - or not - will have a meaningful effect on his political fortunes.
Brown spoke in Egypt, where he was attending a meeting on Gaza.
Unlike an earlier £37 billion, or $54.5 billion, program that used taxpayer funds to take stakes in troubled British banking institutions, the plan to be announced Monday will have the government, for a fee, insure the troubled assets on bank balance sheets up to a certain level, people briefed on the planning said Sunday.
Seen as a quicker route to get banks to start lending again - as opposed to the creation of separate so-called bad bank to acquire and manage distressed assets - the plan would also allow banks to identify their worst-performing, subprime-mortgage-related assets, while also keeping the taxpayer's exposure limited.
The emerging government strategy follows from weeks of criticism that the original plan this autumn had not done enough to stimulate bank lending in the face of a rapidly deteriorating economy - by some estimates the worst among developed nations.
The increased urgency also comes in the wake of another terrible week for British bank shares as fears grow worldwide that banks will be hit with larger write-downs and face the possibility of nationalization.
In the United States, the stocks of Citigroup and Bank of America hit historic lows last week as investors recoiled in shock at the size of bank losses and the prospect that the government would be required to take larger stakes in troubled financial institutions.
In Britain, Barclays shares plunged almost 25 percent on Friday as speculation swirled among traders and short-sellers that the bank would take a large write-off and that its chief executive, John Varley, and its president, Robert Diamond Jr., would be removed.
The stock's plunge prompted the board of Barclays to take the highly unusual action of issuing an evening statement on Friday, in effect preannouncing the bank's year-end 2008 results, by stating that Barclays expected to report a pretax profit that was "well ahead" of the £5.3 billion estimate of analysts, even after taking into consideration write-downs and other costs.
Barclays is scheduled to announce its full year results on Feb. 17. A spokesman for Barclays said there was no truth to the speculation that its top executives would leave.
Many market analysts have blamed last week's expiry of the government-imposed ban on short-selling of financial shares to have contributed to the loss of investor confidence. Short-sellers bet on a stock's decline.
HSBC has been widely hailed to have escaped the worst of the financial crisis. But its stock slid after a Morgan Stanley report said HSBC would have to raise as much as $30 billion in new capital and cut its dividend because of the worsening economic climate and its thin capital base. HSBC had in the past said its capital position was strong and had declined to comment on speculation that it needed to raise more money.
While Barclays and HSBC may have attracted the attention of short-sellers, weaker banks like the Royal Bank of Scotland and HBOS are expected to make the most use of the government's insurance plan, given expectations of their growing losses. Analysts say that they expect the government's plan to cover as much as £200 billion in distressed assets and that it will be supplemented by a swap program that would increase the government's stake in banks like Royal Bank of Scotland while decreasing the high interest rates that banks are now paying on their preferred government-held shares.
The British government already owns close to 60 percent of Royal Bank of Scotland. Its stake could grow under the new initiative.
The government, facing a growing pressure to take urgent action to stem the British economy's slide, has been increasing its public criticism of laggardly bank lending. The government hopes that the insurance plan will free bank capital to be directed toward the economy. At the same time, the Conservative opposition has scored points against the Labour Party with longstanding criticism that Brown's original bank plan was inadequate.
With the 2010 deadline for a general election looming large, the extent to which Brown's latest bank plan is perceived as successful - or not - will have a meaningful effect on his political fortunes.
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