19 Jan, 2009

New plan to boost banks’ lending

The government has announced a second package of measures to encourage banks to lend to individuals and businesses. The long list of policies includes a scheme to offer insurance against banks losing more money from the bad debts that started the credit crunch. Prime Minister Gordon Brown said the new announcements were vital. Meanwhile, the Bank of England is to be able to buy assets direct from firms. Yet despite the new initiatives, banking shares have fallen heavily. By mid-afternoon in London, Royal Bank of Scotland (RBS) was down 63{6060b2de664e4eaa3e7b7e86961ce2c4bbd7a29b6c1097abf8257a4e5b07383e}, while the new Lloyds Banking Group had dropped 34{6060b2de664e4eaa3e7b7e86961ce2c4bbd7a29b6c1097abf8257a4e5b07383e}. Four key points On another day of major development for the banking sector, here are the key points of the government’s latest announcement: Banks will be able to take up government insurance against their expected bad debts The Bank of England will be able to buy up to £50bn worth of stakes in companies in all sectors of the economy Northern Rock has been given extra time to repay its loans from the government The government is increasing its stake in RBS to nearly 70{6060b2de664e4eaa3e7b7e86961ce2c4bbd7a29b6c1097abf8257a4e5b07383e} from 58{6060b2de664e4eaa3e7b7e86961ce2c4bbd7a29b6c1097abf8257a4e5b07383e}. RBS also said it was set to report a huge loss for 2008, with asset write-downs of up to £20bn. Insurance plans Under the insurance scheme, banks will agree with the government the amount they expect to lose from particular debt. The Treasury will then sell insurance against about 90{6060b2de664e4eaa3e7b7e86961ce2c4bbd7a29b6c1097abf8257a4e5b07383e} of the institutions’ additional losses from the debt. The banks will have to pay for the insurance, but the government says it does not expect to be paid in shares. While criticising the banking sector for some irresponsible lending in the past, Mr Brown said the new scheme was vital to help restore normal lending levels. “Good businesses must have access to credit, jobs should not be lost needlessly,” he said. “It is because of this that we are taking the action to expand lending.” The government hopes that by insuring banks against additional losses, it will encourage them to resume normal lending to businesses and individuals. Chancellor Alistair Darling told the BBC that banks taking out the insurance would have to make “very specific legally binding agreements to lend more money”. Despite the scope of the government’s latest announcement, it has done little to lift investor sentiment in the banking sector, at least initially. Under the Bank of England’s new role, it will be able to buy up to £50bn of high quality assets directly from companies. In the past, it has only bought such assets from banks or financial institutions. A new subsidiary company will be set up to buy the assets, but the Bank’s executive will decide what sort of assets it will buy and from which companies. But the list of assets includes corporate bonds, so some companies will now be able to borrow money directly from the Bank of England. Liberal Democrat treasury spokesman Vince Cable said the government’s latest plans did not go far enough, and that instead, it should now nationalise the whole banking sector. “The government must bite the bullet on the public ownership and control of the banks to ensure that lending is maintained to sound companies who can keep the economy ticking over in these turbulent times,” he said. Northern Rock extension There have also been changes to the terms of previous bank rescues. Northern Rock has said that it is to be given longer to repay its loans from the government. There was concern that the timetable for repaying the loans was forcing Northern Rock to reduce its mortgage lending too quickly, which was not in line with the expansion the government wanted. In another announcement, RBS said it had agreed with the Treasury to swap the £5bn of preference shares the government holds for new ordinary shares. This will mean the government’s stake in the bank will increase from 58{6060b2de664e4eaa3e7b7e86961ce2c4bbd7a29b6c1097abf8257a4e5b07383e} to nearly 70{6060b2de664e4eaa3e7b7e86961ce2c4bbd7a29b6c1097abf8257a4e5b07383e}, but it will reduce the amount that the bank has to pay to the government every year. The chancellor said that as a result RBS would have to lend more money. Hefty losses The agreement came as RBS said it expected to announce 2008 losses of between £7bn and £8bn. However, RBS also said it may have to write down the value of past acquisitions, including the share of Dutch bank ABN Amro it bought in 2007, which could lead to a hit of up to £20bn. Another bank helped by the earlier recapitalisation was the combination of Lloyds TSB and HBOS. They announced this morning the completion of their merger to form Lloyds Banking Group. (credit: bbc.co.uk)

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