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“Calm and orderly” decision-making? Hardly. Now that we finally have details of the government’s leaked plan, how does it look? The good news is that it is comprehensive, dealing with the banks’ liquidity, capital and funding crises. In that sense, it is bolder than the US bail-out.
On liquidity, the Bank of England has not just opened the spigot, it has flooded the place, doubling the size of a liquidity scheme and broadening the range of acceptable collateral.
The capital injection of £25bn, plus a further £25bn if needed, was anticipated, though confusion reigns on how it will be divided up – Santander, the Spanish bank that owns Abbey, and HSBC have already made clear they are not interested, while Barclays, for one, has indicated it will bend over backwards to tap its shareholders for funds first. The figure has presumably been reverse-engineered to produce credible capital ratios. It should lift core Tier 1 ratios into the 7 to 8 per cent range, which is probably higher than they were when banks went into the last bad consumer recession. Taxpayers will get remunerated for the capital they are providing, via a chunky yield that should be in double digits.
The most significant element of the plan, though, is the bold attempt to unjam banks’ wholesale funding markets via a £250bn guarantee. The novelty is that, instead of a blanket deposit guarantee, the UK government is taking more careful aim. What banks have desperately needed in the past few weeks is term funding. So far they have staggered along with overnight funding and central bank liquidity. That is obviously not sustainable. Will it be enough? Barclays, HBOS, Royal Bank of Scotland and HSBC between them have about £110bn of debt securities maturing in 2008 and 2009. But the UK banks do not operate in a vacuum. The UK government has done its bit. If funding markets are to unfreeze, other governments need to join in.
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