U.K. to Inject About $87 Billion in Country's Banks

By Ben Livesey and Jon Menon
More Photos/Details

Oct. 8 (Bloomberg) -- Prime Minister Gordon Brown's government will invest about 50 billion pounds ($87 billion) in an unprecedented step to prevent a collapse of the U.K. banking system.

As part of the plan, the government will buy preference shares, and the Bank of England will make at least 200 billion pounds available for banks to borrow under the so-called special liquidity plan, the Treasury said in a statement today. The government will also provide a guarantee of about 250 billion pounds to help refinance debt.

The steps to partially nationalize the banking industry provide ``the necessary building blocks to allow banks to return to their basic function of providing cash and investment for families and businesses,'' Chancellor of the Exchequer Alistair Darling said today.

The worsening credit crisis has forced the U.K to join the U.S., Ireland, Iceland, Belgium and Spain in rushing out untested bailout measures to save their largest banks. Edinburgh-based Royal Bank of Scotland Group Plc and HBOS Plc, Britain's biggest mortgage lender, surrendered more than half their market value this week as investors lost confidence in their ability to fund themselves.

The government said it will make 25 billion pounds immediately available in the form of preference shares and stands ready to provide an additional 25 billion pounds. The amount available to each bank will vary and will depend on their dividend payouts, executive pay policies and will require the banks to lend to small businesses and home owners, the government said.

`Blanket Guarantees'

``These measures are better than blanket guarantees, which don't change the behavior of banks,'' said Peter Hahn, a fellow at the Cass Business School in London and former managing director of Citigroup Inc. ``The taxpayer has direct exposure and direct control on the banks, which is a good thing. Darling has got it right.''

The latest U.K. steps come after the government nationalized Northern Rock Plc and Bradford & Bingley Plc this year and arranged the takeover of HBOS. Darling and Brown are trying to prevent the financial-services industry, which accounts for about a fifth of the London economy, from collapsing under the weight of the global credit crunch. President George Bush approved a plan last month to spend $700 billion buying distressed assets from banks.

U.K. financial service companies will cut 12,000 jobs before year end, a third more than in the same period last year, Britain's biggest business lobby group said Sept. 29.

Participating Banks

Besides RBS and HBOS, Abbey, Barclays Plc, HSBC Holdings Plc, Lloyds TSB Group Plc, Nationwide Building Society and Standard Chartered Plc are eligible under the U.K. plan.

Most British banks fell today. Barclays dropped 13 percent to 247 pence at 9:20 a.m. in London, and RBS lost 4.4 percent to 86 pence. Lloyds TSB declined 6.8 percent, and HSBC, which said it has no current plans to use the government proposal, slumped 4.3 percent. HBOS rose 21 percent to 114.4 pence at 9:10 a.m.

The government should have specified how much capital goes to each bank, said Robert Talbut, who manages 31 billion pounds at Royal London Asset Management in London. ``To say 25 billion pounds is available and it's up to each bank how they will draw it down, is not credible.''

RBS, Barclays, Lloyds TSB and three other U.K. banks need to repay as much as 54 billion pounds of debt by the end of March 2009 as borrowing costs reach record highs and banks are reluctant to lend to each other. The total, which includes bonds, convertible bonds and commercial paper, is triple the debt repaid in the same period a year ago.

Coming Due

RBS has about 11.5 billion pounds of obligations coming due in the next six months, while Barclays, the U.K.'s second-biggest bank by market value, has 15.9 billion pounds maturing, according to data compiled by Bloomberg.

U.K. banks have been talking to government officials for weeks about selling stakes to the Treasury and lifting the guarantee on bank deposits. Ireland and Germany increased their deposit guarantees after the near-collapse of banks in those countries shook investors' confidence.

``The package addresses the most significant issues in the market, namely confidence in the strength of the banking system and the working of the money markets,'' Barclays CEO John Varley said today in statement.

While RBS denied ``speculation'' yesterday that it asked the government for help, the bank has been overstretched since it paid about 14 billion euros ($19 billion) last year for the investment banking and Asian units of Amsterdam-based ABN Amro Holding NV. The 12.3 billion pounds that RBS raised by selling shares at 200 pence apiece in June wasn't enough, and shares now trade for less than half as much.

`Unprecedented Conditions'

The government plan will address ``unprecedented conditions in the financial system'' and help RBS strengthen its position, RBS spokeswoman Carolyn McAdam said in a statement.

Standard & Poor's cut RBS's credit rating this week for the first time in 10 years, saying RBS is ``less well positioned than some of its major global peers'' as it seeks capital.

RBS, which bought NatWest bank for 24 billion pounds in 2000, is struggling with rising defaults and a slumping housing market in Britain and the U.S. The bank, which had 5.9 billion of writedowns and a net loss of 761 million pounds in the first half, will have about 1.1 billion pounds of writedowns later this year, threatening its ability to reach a target of raising Tier 1 equity capital to 6 percent by the end of 2008, analysts at JPMorgan Chase & Co. said Oct. 1.

New Low

HBOS fell 41 percent yesterday to a new low as investors became skeptical of its government-arranged takeover by London- based Lloyds TSB, the U.K.'s biggest provider of checking accounts.

Lloyds TSB agreed Sept. 18 to buy HBOS in a stock swap valued at the time at 10.4 billion pounds. HBOS's market value has since fallen to 5.1 billion pounds, even though Lloyds TSB's takeover was still valued yesterday at more than 10 billion pounds.

The U.K. funding plan ``is very much in the interests of shareholders and customers,'' HBOS said in a statement today.

To contact the reporter on this story: Ben Livesey in London blivesey@bloomberg.net