ROLE OF THE GOVERNMENT
The UK government has announced a package of measures aimed at rescuing banking system that makes 400 billion pound. 100 billion pound will be available in short term loans from bank of England on top of an existing loan facility. Banks will have to increases their capital by at least 25 billion pound and borrow from government. An additional 25 billion pound in extra capital will be available in exchange of preference shares. Government described as the root cause of current financial crisis is liquidity, capital and funding At least 200 billion pound will be made available from bank of England for short term borrowing to provide liquidity to banks Those banks who wished to strengthen capital ratios through the government is required to maintain bank recapitalization fund.
GOVERNMENT SUPPORT TO NORTHERN ROCK
Northern Rock announced that they would be offering £14 billion worth of new mortgages, over the next two years, as a part of their new business plan. This type of new lending will be partly funded by an increase in the government loan, a reversal of previous strategy to pay the loan off as quickly as possible by actively encouraging mortgage customers to leave when their mortgage deal matures. The reason for this change being government policy to increase the availability of credit. This £14 billion will be split into £5 billion in 2009 and £9 billion in 2010. The Government announced guarantee arrangements in all existing retail savings in, certain existing wholesale liabilities of, Northern Rock. Govrnment asked northern rock bank for immediate financial suppot from bank of England. Government have taken northern rock bank into temporary public ownership using powers under banking act. and announced that it would strengthen Northern Rock’s capital position by converting up to £3 billion of the Government loan into equity, and converting £400 m of preference shares into ordinary shares.
GOVERNMENT SUPPORT TO RBS (Royal bank of Scotland)
The government is to own 57.9% of royal bank of Scotland after share holders bought only a tiny proportion of the new shares being offered by the bank. The share issued by RBS , which owns NatWest was part of government plan to recapitilise banks. The government pay about 15 billion pound for the majority stake of bank. It will also buy 5 billion pound of shares in the bank. The government altered the terms of the bail out to allow preference shares - which do not carry voting rights - to convert into ordinary shares The preference shares were originally supposed to be held by the government for three years and carried a 12% rate of interest at a cost to RBS of £600m. The Government and RBS’s decision to take this course of action was to make additional core Tier 1 capital available to the bank and was justified on the grounds that it would strengthen the bank’s resources and enable it to “build its capital further
Government support to Bradford & Bingley
The UK government has taken over the mortgage operation and headquarters of Bradford & Bingley plc , the UK’s biggest lender to landlords. Government used provisions contained in banking act to transfer the bank retail deposit business along with its branch network to Abbey National bank. Bradford & Bingley assets and Liabilities comprising its mortgage book, personal loan book, headquarters and relevant staff, and treasury assets and its wholesale liabilities was taken into public ownership with the intention of winding down operations. As part of the transfer order, the Government put in place guarantee arrangements for six months to safeguard certain wholesale borrowings and deposits with Bradford & Bingley in order to provide assurance to wholesale depositors and borrowers and preserve wider financial market instability and maximise proceeds in the downturn.
Bank recapitalization was necessary to maintain confidence in the UK banking sector. Given prevailing market...
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