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Global News Brief

New banking bailout announced  - January 2009

On January 19, the U.K. government launched its second rescue plan to insure banks against further losses. This plan offers guarantees on banking debt and increases government purchases of high-quality securities. 

Key Details

The main pillars of the program are:

  • An extension of the Credit Guarantee Scheme that provides government insurance for newly-issued bank debt.
  • A new guarantee plan for high-quality (AAA), asset-backed debt targeted at the mortgage, corporate and consumer debt market.
  • The nationalized bank Northern Rock is scaling back – for now – its deleveraging process, which had put additional pressure on the mortgage lending market.
  • The government will offer some type of price insurance (details are yet to be determined) for illiquid assets, where banks face difficulties in assigning a current market value.
  • The Bank of England received authority to buy assets such as corporate bonds and asset-backed securities to provide further liquidity to the market.

The total cost of this rescue plan remains to be seen. The government has not offered any estimates, pointing out that it cannot know the amount of protection that will be sought.

Background

In October 2008, the U.K. government announced a GBP 400 billion (USD 570 billion) package that included GBP 37 billion (USD 52.7 billion) of capital injections into Royal Bank of Scotland (RBS), HBOS and Lloyds TSB Group. It has since been found that this was not enough for banks to resume lending as normal.

The new plan was announced after RBS recorded the biggest losses in British corporate history, estimating that they could lose as much as GBP 28 billion (USD 39.8 billion). The state’s share in RBS will now soar from 58 percent to 70 percent.

For financial markets, the renewed trouble and the necessity of a new bailout package raised further concerns on the outlook for the U.K. economy and caused the pound to fall significantly.