Government Announces £400 Billion Rescue Package
The Chancellor of the Exchequer, Alistair Darling, announced yesterday (8th October) that the Government was launching a £400 billion rescue package for the UK banking sector, in a move similar to that of the $700 billion package announced recently in the US.
Initially there will be £50 billion made available to banks to recapitalise the institutions in exchange for a part nationalisation of the companies and a number of high street banks have already agreed to the scheme. In addition to this investment, there will also be another £200 billion from the Bank of England in the form of short term loans to banks. It is hoped that the move will be sufficient to adequately strengthen the financial system in the UK and avoid further collapses of banks and building societies across the country.
The special liquidity scheme, which was introduced earlier this year by the Bank of England, is also to be extended from £50 billion to £200 billion, in an attempt to restore confidence in lending between different banks and also guarantee these loans, which will let banks exchange bad debt loans for Government backed securities.
In exchange for the deal, the Government has insisted that there is an upper limit placed on executive pay deals and bonuses in the banking sector and that the benefits of the scheme must be passed on to consumers and small businesses, to help with their mortgages and other loans.
Along with the announcement of a half a per cent cut in interest rates yesterday, this move could restore confidence in the mortgage and homeowner loan markets and provide a welcome boost for the housing sector in the UK, although the recovery is likely to take some considerable time.
The Bank of England said in a statement yesterday “The Bank of England will take all actions necessary to ensure that the banking system has access to sufficient liquidity. In its provision of short term liquidity the bank will extend and widen its facilities in whatever way is necessary to ensure the stability of the system.”
