UK Bank Bailout Has Strings Attached

Last Updated Oct 9, 2008 1:05 PM EDT

UK Prime Minister Gordon Brown's government will make £500bn available through a series of measures designed to salvage the fortunes of struggling commercial lenders.

These include

  • Debt issued by banks will be guaranteed up to £250bn
  • Up to £200bn from the Bank of England for short-term loans
  • £25bn Treasury capital
  • £25bn available in exchange for preference shares.
Out of the eight banks for which support's available, it's expected that HSBC, Abbey and Standard Chartered will be likely to turn down the equity-raising option.

Overall, it gets the thumbs up at Lex (free registration). " No bank can now say it cannot get hold of cash or cash-like securities when the Bank is doubling the size of its special liquidity scheme and extending (again) the type of collateral it will accept."

But as Investors Chronicle (free registration) notes, government's involvement comes with strings attached. To participate, lenders have to sign an agreement with financial regulator the FSA. It will want to know about dividend and executive remuneration policies "and will require a full commitment to support lending to small businesses and home buyers," according to a Treasury statement.

This puts shareholders at the bottom of the priority list and executive pay in the firing line. There's every chance for further regulations to be added in the future, as Jon Moulton's argued.

Former Citigroup MD and Cass Business School fellow Peter Hahn believes the measures are better than guarantees, which wouldn't have forced banks to change their behaviour. This way, he says, "the taxpayer has direct exposure and direct control on the banks... Darling has got it right."

Damian Reece argues that different banks will need different amounts of capital, but all need to be brought up to the same capital ratios, however unfair that may be on the more robust banks.

He also called (earlier today) for interest rate cuts, his request answered by the Bank of England, which pushed forward its interest-rate decision and cut UK rates to 4.5 per cent, along with six other international banks.

It may be too late to keep the UK from entering a severe slowdown. But it should keep the Grinch from stealing Christmas from high-street retailers.