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Last updated: January 19, 2009 2:08 pm
Gordon Brown on Monday unveiled a second bank rescue package including powers for the Bank of England to lend up to £50bn directly to businesses, as he accused the Royal Bank of Scotland of taking ”irresponsible risks” as the bank’s shares collapsed.
His comments came as RBS on Monday warned it could report an annual loss of up to £28bn, following the mis-timed acquisition of ABN Amro, the Dutch lender it acquired as part of a €71bn (£63bn) hostile break-up bid in 2007.
”Almost all their losses are in subprime mortgages in America and related to the acquisition of ABN Amro. These are irresponsible risks taken by the bank with people’s money in the UK,” Mr Brown said, adding that the decision to buy ABN ”was wrong”.
The outburst from Mr Brown came as the Treasury agreed to replace the £5bn in RBS preference shares held by the government since the October bailout with ordinary stock. This will increase government ownership to almost 70 per cent.
Shares in RBS fell 20.1p or nearly 60 per cent to 14.6p, valuing the bank’s capital at less than £6bn, as investors feared the bank may be fully nationalised.
Stephen Hester, chief executive of RBS, said that full nationalisation was something that was discussed over the weekend with the government but it was ”something we all wished to avoid.”
The government’s decision to increase its RBS holding was part of a second bailout package designed to shore up Britain’s struggling lenders.
In an effort to bring down borrowing costs, a new £50bn fund will be established to allow the Bank to extend loans to some of Britain’s biggest companies. Alistair Darling, chancellor, said the Bank would take ”security and assets” that would be sold on ”once the economy starts to improve”.
Denying that he was ”writing a blank cheque” for the banks, Mr Brown said the steps were necessary to revive lending in the economy and compensate for retrenchment of the world’s banking system.
The establishment of the Bank’s corporate lending fund will have a neutral effect on money supply. But it provides the framework for the Bank of England to implement a policy of ”quantitative easing” or effectively pumping money into the economy should it decide there is a need to do so.
Sterling, however, fell against leading currencies including the yen, dollar and euro in reaction to the government’s latest measure to shore up the UK’s financial system. UK government bond prices also fell forcing gilts sharply higher.
Lee Hardman at Bank of Tokyo-Mitsubishi UFJ said: “The government is putting the framework in place for the Bank of England to move towards quantitative easing, which would tend to be negative for sterling, because it would increase the supply of currency in the market. The market is anticipating that and sterling has fallen accordingly.”
The reaction in equity markets was broadly positive with the FTSE rising nearly 2 per cent in morning trading after suffering heavy falls last week.
The scheme, which will be detailed more fully by the end of February, will allow banks to buy government protection for eligible assets by paying a fee, which will be agreed case by case. The fee is most likely to be paid through the issue of preference shares to the government, but the Treasury said it would consider taking cash.
The banks will remain responsible for a “first loss” amount, similar to an excess in a normal insurance claim, and will also remain liable for about 10 per cent of the residual loss. The government insisted on this clause to make sure the banks had an incentive “to endeavour to keep losses to a minimum.”
The assets can be denominated in any currency. Those most likely to participate in the scheme are portfolios of commercial and residential property loans; structured credit assets, including certain asset-backed securities; and other corporate and leveraged loans. The scheme is expected to continue for at least five years.
Similar schemes are expected to be set up in other countries, and the government said it would hold discussions with its international partners to co-ordinate them. Details of a similar scheme being considered by the US government are expected to emerge in the coming days, while other countries are expected to follow.
The new measures to stabilise the financial system and encourage banks to start lending again is unlikely to have an immediate cost to the taxpayer, economists said, but could cause the already severely stretched public finances to get even worse should further large losses materialise on assets guaranteed by the government.
The fresh efforts to help banks are ”exposing the public finances to more risk” than the original bailout package, according to Gemma Tetlow of the Institute for Fiscal Studies.
Among the other measures, the government said it would extend the credit guarantee scheme which had been due to expire in April to the end of the year. It announced a new guarantee scheme, to begin in April, for triple-A rated asset-backed securities, including mortgages and consumer debt.
It announced that Northern Rock would stop winding down its mortgage book and return to offering new loans in an attempt to bring new capacity into the mortgage lending market.
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