Britain unveiled a massive rescue package for British banks this morning that included plans to inject up to £50 billion of government money into the country's biggest operators.
Under the plan the British government will
• Offer banks short-term liquidity;
• Make new capital available to banks;
• Give the banking system enough funds to maintain lending in the medium-term.
The decision follows days of crippling pressure on high street banks, some of which have lost nearly half their value on the stock market amid investor fears they could collapse if they are not handed a massive liquidity lifeline.
Mr Darling said the government's bank rescue package was the start of a solution to the logjam in the bank lending system, and did not rule out further action.
Mr Darling and prime minister Gordon Brown met the heads of the Bank of England and Financial Services Authority (FSA) yesterday for what the government said were talks on stabilising the banking system.
“We have been working closely with the governor of the Bank of England, the FSA and the financial institutions to put the banks on a longer-term sound footing,” Mr Darling said in a televised statement following that meeting.
Mr Darling told the House of Commons later that the bailout would protect depositors and safeguard taxpayers’ interests
“The implications for the public finances as a result of today’s announcements will be exceptional, and mostly temporary,” he said.
Under the three-pronged strategy the Treasury will inject up to £50 billion of capital into UK banks, if requested, by taking preference shares, the Bank of England’s special liquidity scheme will be extended to a total of “at least” £200 billion and the Government will underwrite around £250 billion of inter-bank lending.
Shadow chancellor George Osborne backed the proposals and said: “This is an
extraordinary moment, when the British taxpayer is forced to step in to bail-out
the banking system.
“But let us be clear: we do this not to rescue the banks or the bankers but to
rescue the economy and the millions of families who depend on it.”
Governments around the globe, from Iceland to South Korea, are fighting to unfreeze lending and borrowing brought to a halt by fears of hidden losses in financial institutions.
Pressure mounted on the British government to take swift action after shares in its major banks plunged on Monday and yesterday. That followed reports that one of the options being considered by Britain was a massive injection of capital into the banks, which could dilute current investors' holdings.
HBOS shares lost more than 40 per cent yesterday and Royal Bank of Scotland dropped 39 per cent.
It was unclear whether Britain's rescue plan, which follows the US decision to provide more than $700 billion in a bailout of banks and financial institutions, would be enough to restore market confidence following days of near panic.
“Barring the announcement of a particularly radical and fast-acting package, the market is unlikely to find much short-term stimulus from any unilateral plan,” said Martin Slaney, head of derivatives at GFT Global Markets, in a research note.