By Andrew MacAskill
April 23 (Bloomberg) -- U.K. government support for the banking system has risen to 1.4 trillion pounds ($2 trillion) and may climb higher as the financial crisis spreads to building societies and economists warn lenders may need more aid.
Prime Minister Gordon Brown’s government yesterday offered to guarantee some mortgage-backed bonds, adding as much as 50 billion pounds to the bailout that began with the collapse of Northern Rock Plc in 2007. The amount invested in, loaned to or pledged to back bank assets now equals Britain’s gross domestic product, or 22,800 pounds for every person in the U.K.
“The size of this financial bailout is unprecedented,” said Alan Clarke, an economist at BNP Paribas in London. “The worry is that this is not going to be enough and the government may need to come back and step in again.”
The U.K. government has taken over four banks, insured assets and underwritten loans to spur an economy ravaged by the global credit crisis. Brown is using that leverage to force banks to increase lending as he trails the Conservative Party in the polls and prepares for elections no later than June 2010.
The Treasury, in the budget submitted to Parliament yesterday, estimated the bailout may cost taxpayers 50 billion pounds. That contradicts with the International Monetary Fund’s estimate that the bill may climb to 9.1 percent of GDP, or about 132 billion pounds.
In return for state aid, Lloyds Banking Group Plc, Royal Bank of Scotland Group Plc and Northern Rock Plc have pledged to increase lending by 44 billion pounds over the next year.
150 Billion Pounds Needed
That’s 150 billion pounds less than the economy needs to return to a nominal growth rate of 5 percent, said Vicky Redwood, an economist at Capital Economics Ltd. who formerly worked at the Bank of England.
“This problem is not going to ease in the near term with unemployment rising sharply,” Redwood said. “The government may put more capital into the banks or promise to put more capital into the banks to get lending going again.”
Government measures to cap losses on toxic assets have eased strain in the credit markets. The difference between the three-month London interbank offered rate for pounds and the expected average Bank of England base rate, an indicator of banks willingness to lend, has narrowed by 56 basis points since Feb. 26, when RBS said it would enter the government’s asset insurance plan. The spread was 107 basis points yesterday, compared with a record 299 basis points on Nov. 6.
“Government’s interventions in the financial system have therefore protected the economy from the worst costs of financial instability or bank failures,” the government said in the budget report.
Building Societies
Brown may need to provide more money to help building societies, customer-owned lenders that accounted for 18 percent of the U.K. residential mortgage market in 2007, according to the Council of Mortgage Lenders.
Moody’s Investors Service last week downgraded the credit ratings of nine building societies, including Nationwide, the U.K.’s largest, citing concerns about further credit losses. The cut will make it harder for the lenders to raise funding in the wholesale markets.
“Building societies that made imprudent commercial lending decisions are most likely to need a government bailout,” said Ray Boulger, senior technical manager at Charcol Ltd., Britain’s biggest online mortgage broker. “A number of societies expanded into commercial lending without the necessary expertise to know exactly what they were doing.”
Bloomberg News tabulated the extent of the government’s effort to rescue the financial system using data from the Treasury, Bank of England and U.K. banks.
Government Pledges
Commitments include insuring 526.5 billion pounds of assets, 250 billion pounds to guarantee bank lending and 154 billion pounds to take on the liabilities of nationalized banks Northern Rock and Bradford & Bingley Plc.
The government also loaned the Bank of England 185 billion pounds to finance a special liquidity program for banks. The central bank agreed to purchase as much as 150 billion pounds of assets with new money to lower borrowing costs through so-called quantitative easing.
Other state aid to the industry includes direct investment in U.K. banks, assistance for customers of Icelandic banks and the bailout of Dunfermline Building Society.
The 1.4 trillion figure doesn’t count government pledges to stimulate the economy.
Since credit markets froze in August 2007, U.K. banks have announced 76.6 billion pounds of losses and at least 45,000 job cuts, according to data compiled by Bloomberg.
The five-member FTSE 350 Banks Index has gained 68 percent since March 7, when Lloyds joined RBS in entering the asset insurance plan. The index fell 57 percent in 2008.
“The whole banking system is still very fragile,” said Peter Hahn, a former managing director of Citigroup Inc. and now a fellow at London’s Cass Business School.
“When you look at the income numbers that have been put out by banks recently they contain so much fudge and financial manipulation. You could say that the automobile industry has a clearer future at the moment.”
To contact the reporter on this story: Andrew MacAskill in London at amacaskill@bloomberg.net
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