Today, in an effort “to support stability in the financial system,” the U.K. Treasury announced that it is “taking decisive action” by implementing the comprehensive measures it announced on October 8th, “to make commercial investments in UK banks and building societies to help stabilise their position and support the long term strength of the economy.” The measures intend to:
- Provide sufficient liquidity in the short term;
- Make available new Tier 1 capital to UK banks and building societies to strengthen their resources permitting them to restructure their finances, while maintaining their support for the real economy, through the recapitalization scheme which has been made available to eligible institutions; and
- Ensure that the banking system has the funds necessary to maintain lending in the medium term through the credit guarantee scheme available to eligible institutions in relation to new short and medium term debt issuance.
Under the recapitalization scheme, the Government is making capital investments to RBS, and upon successful merger, HBOS and Lloyds TSB, totaling £37 billion. Upon such capital investments, each of these institutions will have a Tier 1 capital ratio in excess of 9%, well above the international minimum standard and “at a level that should put them on a strong footing for the future.” The Government has stated that “transparent arrangements will be put in place to ensure that any role for the Government in relation to investment decision-making is clearly defined.” Furthermore, the Government does not plan to be a permanent investor in UK banks; rather the Government’s intention is to, over time, “dispose of all its investments it is making as part of this scheme in an orderly way.”
In addition, certain UK banks having substantial business in the UK, who “have raised or committed to raise, within the required timeframe, Tier 1 capital in the amount and form the Government considers appropriate, whether by Government subscription or from other sources,” are also eligible to take advantage of the Government’s 2008 Credit Guarantee Scheme. Details relating to fees, the period under which guarantees will be issued and the application process can be found here.
As part of the recapitalization investment, the government and the participating banks have agreed to the following:
- Maintaining, over the next three years, the availability and active marketing of competitively-priced lending to homeowners and to small businesses at 2007 levels;
- Support for schemes to help people struggling with mortgage payments to stay in their homes, and to support the expansion of financial capability initiatives;
- Remuneration of senior executives - both for 2008 (when the Government expects no cash bonuses to be paid to board members) and for remuneration policy going forward (where incentive schemes will be reviewed and linked to long-term value creation, taking account of risk; and restricting the potential for "rewards for failure");
- The right for the Government to agree with boards the appointment of new independent non-executive directors; and
- Dividend policy.
The government confirmed that it has informed the European Commission of its recapitalization scheme and that it is “continuing to collaborate internationally to stabilise and strengthen the global financial system,” following the meetings of G7 and G20 Finance Ministers and the IMF on Friday and Saturday.