UK Banking Bailout, Sweeping Reforms

123jump.com Staff
08 Oct, 2008
New York City

UK offered up to

[R]7:00PM London, 2:00PM New York - Bank of England cuts key rate to 4.5%. U.K. unveils £50 billion rescue package for banks.[/R]

London market averages plunged the most in four years after the £50 billion financial bailout package coupled by the interest rate cut failed to stimulate the market. The UK also offered 200 billion in loans to eight largest banks and BoE offered to set up 250 billion of liquidity scheme for banks to swap illiquid assets.

Commodity also slumped on mounting fears that the global economy will slip into a recession.

Market Sentiment

In London trading FTSE 100 fell 5.18% or 238.53 to 4.366.69.

Of the 102 FTSE 100 stocks 8 rose, and 94 declined. HBOS Plc led advancers in the index shares with a rise of 24.47% followed by TUI Travel gaining 4.05%.

Bank of England Cuts its Key Rate to 4.5%

The Bank of England reported on its Web site today that the Monetary Policy Committee voted at a special meeting to slash its bank rate by 0.5 percentage points to 4.5%.

However the Committee observed that cuts in the official interest rates can''t resolve the current problems in the financial markets, adding that a marked increase in the capital of banking sector will be required in order to restore stability.

Businesses and households are presently bearing the brunt of tightened credit conditions as banks become reluctant to lend to each other.

The consumer price index inflation gained 4.7% in August on rising food and raw material prices.

Although inflation is likely to rise above 5% in the coming months, it is expected to gradually fall back in tandem with the slowing oil prices.

Similarly, the Bank of Canada, the European Central Bank, the Federal Reserve Bank in the U.S., Sveriges Riksbank, the Swiss National Bank and the Bank of Japan also cut their key interest rates.

Central banks from across the world are making unprecedented efforts to provide liquidity so as to prevent the collapse of the financial markets.

U.K. Unveils £50 billion Bailout Package for Banks

The U.K. Treasury in a sweeping reform what amounts to near bailout of banks and provide additional funding to improve liquidity in the market.

UK government will inject £25 billion in eight of its largest banks and purchase preference shares that will pay dividend to the taxpayers and will have higher priority in the capital structure of these banks. The capital injection is expected to improve Tier 1 capital ratios of participating banks in the program. The government will also offer 200 billion in loans to these banks to improve liquidity.

Banks that will participate in the Government-supported recapitalization scheme include Abbey, Barclays, HBOS, HSBC Bank plc, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland, and Standard Chartered.

Through the agreement the U.K. government will review dividend policies, executive compensation practices and will make it imperative for lenders to support small businesses and home buyers.

The Bank of England will provide £200 billion in what it calls the Special Liquidity Scheme and introduce plans for a permanent regime underpinning banking system liquidity, including a Discount Window facility. The plan will allow banks to swap illiquid mortgage bonds for cash.

Gainers & Losers

HBOS Plc led advancers in the FTSE 100 index shares with a rise of 24.47% followed by rises in TUI Travel of 4.05%, in Whitbread of 3.08%, in ICAP Plc of 2.44%, and Stagecoach Group of 1.48%.

Sainsbury led decliners in the FTSE 100 index shares with a fall of 14.92%, in Vedanta of 14.03%, in London Stock Exchange of 12.52%, in Petrofac of 11.76%, and Kazakhmys of 11.67%.

Other commodity stocks also fell. Tullow Oil plunged 11.55%, BHP dropped 10.53%, and Rio Tinto of 9.94%.

Europe Markets Review

In London FTSE 100 Index closed lower 238.50 or 5.18% to 4,366.70, in Paris CAC 40 Index decreased 235.33 or 6.31% to close at 3,496.89 and in Frankfurt DAX index lower 313.01 or 5.88% to close at 5,013.62. In Zurich trading SMI decreased 354.31 or 5.51% to close at 6,073.45.