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The next move
Evening Standard07.10.08
What's being planned to save the banks?
So far the Government has adopted a piecemeal approach. There is now agreement that a more comprehensive plan is necessary with the strong suggestion that the Government will step in to recapitalise the big banks - probably Lloyds TSB, Barclays, Royal Bank of Scotland and HBOS.
Recapitalise, what does that mean?
Rightly or wrongly, the stock market thinks that bank balance sheets are not strong enough. By injecting capital, the hope is that banks would feel able to lend more freely and ease the credit crunch.
How much will that cost?
Pick a number and double it - but £50 billion seems reasonable. The suggestion is that the Government pumps in the cash in two tranches, holding the second phase back to see if it is needed. In return, the Government would get a stake in the banks, most likely in the form of preference shares, which, as the name suggests, carry more weight than ordinary shares.
Can the Government just do this?
Yes. Special laws passed in the wake of Northern Rock mean it can take stakes in banks whenever it sees fit. It reduces the value of the shares held by other investors, but that's just tough luck.
Why are bank shares still falling?
Uncertainty. Investors now assume there will be some kind of recapitalisation deal, but they don't know at what price.
What would this do to government finances?
It would depend how they do it, presumably they'd try to find a way to make it look like it is not new borrowing. They'd argue that they have valuable assets in return for the cash. The hope is that the taxpayer could make money once the banks' health is restored. When the Swedes bailed out their system in 1992 that's more or less how it worked out.
