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UK British Bank Bailout Summary

On October 5th 2008, the British government announced a £50 billion rescue package for UK banking institutions.

After considering a variety of ways of injecting cash into ailing banks to help them rebuild their financial position, Chancellor Alistair Darling revealed that the government had agreed to spend up to £50 billion of taxpayers' money buying shares in UK banking institutions.

Full details of the £50 billion bank bailout were released in a London Stock Exchange announcement on the 6 October 2008. According to the statement, the bailout consists of:

• An immediate loan of £25 billion for eight UK lenders, in order to boost their regulatory capital.
• An extra £25 billion loan, in return for preference shares in these lenders (shares that pay a high, fixed rate of interest and rank ahead of ordinary shares).
• The Bank of England's Special Liquidity scheme will be increased from £100 billion to £200 billion, allowing lenders to borrow short term from the Bank by pledging high-quality assets (usually packages of mortgages or other loans).
• Up to £250 billion in loan guarantees will be available at commercial rates of interest, and for a fee, in order to persuade banks to 'unfreeze' the inter-bank lending market.

*This means that banks might resume the process of lending to one another as they are guaranteed the repayment of a loan in the event of the borrowed party going bust.

The following UK lenders have signed up to the government's bailout scheme:

• Abbey (owned by Spanish bank Santander)
• Barclays
• HBOS (set to be taken over by Lloyds TSB)
• HSBC
• Lloyds TSB
• Nationwide BS
• Royal Bank of Scotland
• Standard Chartered

By signing up to the scheme, however, bank bosses must agree to a new charter on executive pay and ordinary share dividends. In addition, future returns to bank shareholders will be lower, thanks to dividend cuts and the dilution of their stakes.

HM Treasury confirmed that other banks and building societies can request to join this safety net.

Risks involved

The government's new banking investment is far from guaranteed, with industry experts saying it could make or lose money for UK taxpayers based on the length of the impending recession. Banks would be hit by bad debts if the recession is longer and harsher than expected, resulting in taxpayers bearing substantial losses from their new semi-nationalised banks.

But the government has made a smart move by buying preference shares in the banks. These pay a dividend and rank above ordinary shares in any break-up, making them a safer bet.

The move should bring an end to the current panic about the security of British banks, although uncertainty still remains over the long-term future.

What it means to UK taxpayers

There are around 25 million households in the UK, meaning that the £50 billion rescue works out at £2,000 per household added to national debt. In effect, this partial nationalisation gives us all a stake in these lenders.

But the major worry is that lenders could take taxpayers' hard-earned money and then lend it back to them at steep rates of interest.