Gordon Brown hails £500 billion bank rescue plan - TriWooOx - 10-08-2008 11:50 AM
Quote:Gordon Brown has said a £500 billion bail-out of British banks will restore "confidence and trust" in the financial system.
The Prime Minister hailed the package, which will see the taxpayer take large stakes in major banks in return for an injection of billions of pounds to prop up their shattered balance sheets, as a comprehensive, ground-breaking solution to the economic crisis.
"This is not a time for conventional thinking or outdated dogma but for the fresh and innovative intervention that gets to the heart of the problem," he said at a Downing Street news conference.
Admitting that Government borrowing will have to be drastically increased to fund the package, Mr Brown insisted that "for every family in the country, the stability of the banking system matters."
He said taxpayers would "earn a proper return", saying: "This support is on commercial terms. We expect to be rewarded for the support we provide."
The announcement prompted volatile trading in the shares of Royal Bank of Scotland (RBS) and HBOS, the banks hammered hardest on the stock market in recent days.
By mid-morning, HBOS had jumped by more than 44 per cent, while RBS - which plunged by more than 40 per cent at one point - was up by almost 16 per cent.
However other banks continued to suffer. Barclays was down more than 9 per cent, HSBC dropped by five per cent and Lloyds TSB, which has made clear its takeover of HBOS is going ahead, was down six per cent. The FTSE 100 index was down by four per cent.
The bail-out plan will see the Government spend up to £50 billion - the equivalent of £2,000 for every taxpayer - on buying priority shares in the banks in order to boost their capital. Half is available immediately, while a further £25 billion can be used if necessary in future.
In addition, the Government will make £250 billion available to underwrite the banks' medium-term debts in an attempt to prevent a disastrous funding gap in the next few years.
Meanwhile the Bank of England will inject a further £200 billion into the money markets under its Special Liquidity Scheme - which sees banks swap risky mortgages for Treasury bonds. The scheme had previously been limited to £100 billion.
The potential liability of £500 billion amounts to more than a third of the annual value of the British economy and is approaching the almost £600 billion of total government spending.
It is hoped that the injection of liquidity will encourage the banks to start lending to and borrowing from each other again. The credit crisis has seen the market for money - which banks rely on for their funding - seize up.
Appearing alongside Mr Brown, Alistair Darling, the Chancellor, said the move came in response to "extraordinary times".
He said: "We want to make sure that we can get the system going again" and insisted that the Government would get taxpayers' money back within three years.
The Treasury made clear that the deal "will carry terms and conditions that appropriately reflect the financial commitment being made by the taxpayer" - expected to mean that the Government has first claim to any dividends and that chief executives cannot be paid huge bonuses.
It said that eight banks had confirmed they would seek Government help under the scheme: "Abbey, Barclays, HBOS, HSBC Bank plc, Lloyds TSB, Nationwide Building Society, RBS and Standard Chartered."
Mr Darling rejected claims that he had "dithered" in failing to make an announcement earlier, saying: "Inevitably, given the complexity of the discussions that need to take place to put together a proposal such as this, it takes time."
"If you look at America, if you announce something and you haven't thought through the consequences, then you get into real difficulties," he added.
The Conservatives said that recapitalising the banks and guaranteeing inter-bank lending was the "right thing" and that they would be "as constructive as possible" in helping to implement the Government's rescue plan.
George Osborne, the shadow chancellor, said: "We want this to work, we hope it will work." However, he added that taxpayers' money must not be used to pay the bonuses of wealthy bankers.
Nick Clegg, the Liberal Democrat leader, also promised support for the Government on what he called "a day of reckoning for the British economy".
"There will of course be a need to examine the detail, but today is a day to stand together," he said.
However he insisted: "There can be no doubt that today marks a fundamental shift in the way we view banks ... The short-term bonus-driven ethos must end today."