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Yes, this really does mean part-nationalisation
Robert Lea8 Oct 2008
Alistair Darling's bank rescue plan. How does it work?
The idea is for the Government to pump in up to £50 billion of taxpayers' money to recapitalise our leading banks in return for preference shares in the banks.
Recapitalisation? Preference shares? I thought this was partial nationalisation
Indeed it is. Recapitalising simply means putting in cash to boost a company's strength. And with banks, money and assets on the balance sheet are measured in what they call Tier 1 capital, the ultimate indication of their strength. Preference shares are what they sound like. They are a special class of share which ranks over ordinary shares. What it means is that if a company goes bust, preference shareholders are first to claw back their investment. It also means that if a company or in this case a bank cannot pay a dividend to ordinary shareholders they usually have a commitment to pay a fixed-income return annually to the preference shareholder.
And yes, this is part-nationalisation because the Government is taking a stake in these banks, and the taxpayer will now part own all those banks who sign up for a bail-out.
Where does this money come from?
You. The bail-out could come in at £2,000 per taxpayer, coincidentally the same amount which we were already in for in the nationalisation of Northern Rock. The Chancellor will not be asking you to write a cheque for these amounts but he will get it back in other ways — namely taxes.
There is no guidance yet on where the Government's financial commitments to the banks will sit in the nation's books. Whichever way you cut it the Government is becoming ever more indebted and will need to manage its money: that is raising taxes and/or cutting spending.
Which banks are getting the money?
Every name you know on the high street. The Abbey, which owns Alliance & Leicester and the Bradford & Bingley. Barclays. HBOS which runs the Halifax. HSBC. Lloyds TSB. The Royal Bank of Scotland which runs NatWest. And unexpectedly the Nationwide, Britain's largest building society. The London-based bank Standard Chartered which operates mainly in Asia is also in.
How does it work?
The banks apply to the Treasury for the cash and negotiations begin on how much of a stake the taxpayer then takes in the bank. The Treasury is making £25 billion immediately available with the option to make another £25 billion available later.
And so the £50 billion question: Will it work?
Who knows? We are in uncharted territory. The previously unthinkable notion of the nationalisation or part-nationalisation of several of the high street banks is an indication of how desperate times have become. Plainly, the Chancellor and the PM believe it will work. But it shows how deeply mired our banks have become.
HBOS raised £4 billion from shareholders this summer and yet still had to scurry into the arms of Lloyds TSB for a rescue. The NatWest banking group the Royal Bank of Scotland raised even more, £12 billion, only to see its share price in recent days collapse.
It all sounds very gloomy. What does that mean for me, my savings and my borrowings?
Currently, £50,000 of deposits with any one bank or institution remain covered by the Financial Services Compensation Scheme. That has already been raised from £35,000.The Government's plan is that by rescuing the banks, none of them will go bust and therefore you won't need the compensation.
In the long-term, it appears likely these banks will not be allowed to take so many risks. That could dilute competition and therefore mean more expensive mortgage rates.
