UK Unveils Partial Nationalization of Banks

Britain committed billions of pounds to a multi-pronged rescue plan for its banking system on Wednesday and joined other major economies in cutting interest rates to tackle the global financial crisis.

In a sweeping move that Prime Minister Gordon Brown said was as bold as a $700 billion U.S. bailout, Britain said it would provide at least 50 billion pounds to immediately increase capital available to struggling high street banks.

"We have led the world today with a proposal to restructure our banking system," Brown said after emergency overnight talks with banking chiefs.

"We are taking the steps that I believe that other countries will take in the future." The talks followed a day of dramatic falls on Tuesday in the shares of British banks threatened by a global collapse in financial confidence that has choked off lending -- the lifeblood of the economy at large.

The banks' troubles have raised popular fears of a bank crash and lost savings, while the wider shockwaves now imperil jobs and industry around the world.

Just days after the U.S. approved a rescue of its crisis-hit financial system, Britain announced it would buy new shares in banks, guarantee up to 250 billion pounds to help them refinance debt, and make at least 200 billion pounds of liquidity available to the market.

The bank support plan was announced just hours before a co-ordinated 0.5 percentage point cut in key interest rates around the world led by the U.S. Federal Reserve.

German deputy Finance Minister Joerg Asmussen said Britain's plan would help financial stability in Europe.

"It contributes to the stability of the British financial system and we know what importance that has for the European financial system," he said.

Brown called in a letter to leaders of the world's major economies on Wednesday for concerted action to guarantee inter-bank lending, a G7 source said.

Some British banks have lost nearly half their value on the stock market amid investor fears they could collapse if they were not handed a massive liquidity lifeline.

Stocks Fall

Banks welcomed the plan, and the stock of one of the more beleaguered players, HBOS, soared by up to 50 percent, before easing to close 24.5 percent higher.

Royal Bank of Scotland, which fell heavily on Tuesday, closed up 0.8 percent. Other banks were lower.

CNBC.com

Investors said the importance of the deal went well beyond the interests of shareholders.

Banks might, it was hoped, be able to resume doing what banks were intended to do -- loan money to feed the economy.

"This package is operating at two levels -- immediate capital strengthen, takes out all the future issues in terms of future (capital) raising, and allow banks to operate with some degree of higher certainty," said Emanuelle Ravano, Managing Director, Pimco Europe.

Pimco is the world's biggest fixed income asset investor.

"Moral hazard is a concept that nobody can afford when markets are going down at this rate." "Moral hazard" has become a central concern in the current crisis.

Critics of bailouts, in Europe and the United States, have argued that people or institutions will behave recklessly if they know they will be rescued when things go wrong.

In all, seven British banks, Abbey, HSBC RBS, HBOS, Barclays, Lloyds TSB and Standard Chartered and the country's largest building society, Nationwide, have committed to increase their total Tier 1 capital, a main measure of bank's financial strength, by 25 billion pounds in total as part of the government's scheme.

The government said it would make 25 billion pounds available to these institutions as preference share capital or permanent interest-bearing shares, which offer a more guaranteed form of income for the holder -- ultimately the taxpayer -- and was willing to help raise ordinary equity if requested to do so.

In return the government will require banks to meet certain terms and conditions that will include banks making commitments to support small businesses and home buyers and to deal with what many see as too generous pay deals for bank executives.

Oil Wheels

In an effort to get banks lending to one another again, the Bank of England will make at least 200 billion pounds available under its Special Liquidity Scheme and conduct three-month sterling and one-week dollar auctions for three months against a wider range of collateral until markets stabilize.

The international financial crisis began with a collapse in the housing market in the United States, which left banks and finance houses through the world with a burden of bad debt.

The BoE's Special Liquidity Scheme, set up in April in what was then the British authorities' biggest response to the credit crisis, allows banks to exchange illiquid assets, including mortgages, for government bills, helping free up balance sheets.

As part of the latest plan, the government will also issue guarantees of short and medium-term debt to banks who commit to raising their Tier 1 capital.

Copyright 2008 Reuters. Click for restrictions.