The announcement occurred less than 48 hours after Britain’s leading share index, the FTSE100, recorded its largest single-day points fall since 1987. A similar bailout package had been passed in the United States the previous week, as the Emergency Economic Stabilization Act of 2008. Details of the rescue package were worked on overnight and were finalised at 05:00. The rescue plan: The plan provides for several sources of funding to be made available, to an aggregate total of £500 billion in loans and guarantees. Most simply, £200 billion will be made available for short terms loans through the Bank of England’s Special Liquidity Scheme. Secondly, the Government will support British banks in their plan to increase their market capitalisation through the newly formed Bank Recapitalisation Fund, by £25 billion in the first instance with a fur-
ther £25 billion to be called upon if needed. Thirdly, the Government will temporarily underwrite any eligible lending between British banks, giving a loan guarantee of around £250 billion. However, only £400 billion of this is ‘fresh money’, as there is already in place a system for short term loans to the value of £100 billion. Alistair Darling, the Chancellor of the Exchequer, told the House of Commons in a statement on 8 October 2008 that the proposals were “designed to restore confidence in the banking system”, and that the funding would “put the banks on a stronger footing”. Prime Minister Gordon Brown suggested that the government’s actions had ‘led the way’ for other nations to follow whilst Shadow Chancellor George Osborne stated that “This is the final chapter of the age of irresponsibility.”
Through the Bank Recapitalisation Fund, the government will buy a combination of ordinary shares and preference shares in affected banks. The amount and proportion of the stake that will be taken in any one bank is to be negotiated with the individual bank. Banks that take the rescue packages will have restrictions on executive pay and dividends to existing shareholders, as well as a mandate to offer reasonable credit to homeowners and small businesses. The long-term government plan is to offset the cost of this program by receiving dividends from these
shares, and in the long run, to sell the shares after a market recovery. This plan may potentially extend to underwriting new issues of shares by any participating bank. The plan has been characterised as, in effect, partial nationalisation. The extent to which different banks participate will vary according to their needs. HSBC Group issued a statement announcing it was injecting £750 m of capital into the UK bank and therefore has “no plans to utilise the UK government’s recapitalisation initiative ... the Group remains one of the most strongly capitalised and liquid banks in the world”. Standard Chartered also declared its support for the scheme but its intention not to participate in the capital injection element. Barclays intends to raise £6.5 billion from private investors, and will cancel its final dividend for the year for a net saving of £2 billion.The Royal Bank of Scotland Group will raise
£20 billion from the Bank Recapitalisation Fund, with £5 billion in preference shares and a further £15 billion being issued as ordinary shares. HBOS and Lloyds TSB will together raise £17 billion, £8.5 billion in preference shares and a further £8.5 billion issue of ordinary shares. The Fund will purchase the preference shares outright, for a total £13.5 billion investment, and will underwrite the issues of ordinary shares; should they not be taken up by private investors, the Fund will undertake to purchase them.
Paul Krugman the Nobel Prize winner for Economics stated in his New York Times column that “Mr Brown and Alistair Darling, the Chancellor of the Exchequer have defined the character of the worldwide rescue effort, with other wealthy nations playing catchup.” He also stated that “Luckily for the world economy,... Gordon
Brown and his officials are making sense,... And they may have shown us the way through this crisis.” The British banking bailout example was closely followed by the rest of Europe, as well as the U.S Government, who on the 14 October 2008 announced a $250bn (£143bn) plan to pur-
chase stakes in a wide variety of banks in an effort to restore confidence in the sector. The money came from the $700bn bail-out package approved by US lawmakers earlier that month. A wave of international action to address the financial crisis had at last an effect on stock markets around the world.
In e conomics, inflation is a persistent increase in the general price level of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money â€“ a loss of real value in the medium of exchange and unit of account within the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (nor-
ma lly the consumer price index) over time. Inflationâ€™s effects on an economy are various and can be simultaneously positive and negative. Negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation is rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future.
Some economists maintain that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply, while others take the view that under the conditions of a liquidity trap, large injections are “pushing on a string” and cannot cause significantly higher inflation. Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to changes in the velocity of money supply measures; in particular the MZM supply velocity.
To day, most economists favor a low and steady rate of inflation. Low (as opposed to zero or negative) inflation reduces the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduces the risk that a liquidity trap prevents monetary policy from stabilizing the economy. The task of keeping the rate of inflation low and stable is usually given to monetary authorities. Generally, these monetary authorities are the central banks that control monetary policy through the setting of interest rates, through open market operations, and through the setting of banking reserve requirements. The inflation rate is widely calculated by calculating the movement or change in a price index, usually the consumer price index. The consumer price index measures movements in prices of a fixed basket of goods and services purchased by a “typical consumer”.
A financial institution licensed as a receiver of deposits. There are two types of banks: commercial/retail banks and investment banks. In most countries, banks are regulated by the national government or central bank. Commercial banks are mainly concerned with managing withdrawals and deposits as well as supplying shortterm loans to individuals and small businesses.
reorganization to institutional clients. While many banks have both a brick-and-mortar and online presence, some banks have only an online presence. Online-only banks often offer consumers higher interest rates and lower fees. Convenience, interest rates and fees are the driving factors in consumers’ decisions of which bank to do business with.
Consumers primarily use these banks for basic checking and savings accounts, certificates of deposit and sometimes for home mortgages. Investment banks focus on providing services such as underwriting and corporate
As an alternative to banks, consumers can opt to use a credit union. what went wrong with the Co-operative Bank Earlier in the year the bank sheepishlyanounced that it was short of money – £1.5bn short, to be precise – which it
neede d to plug a gaping chasm in its capital reserves.As an aside it mentioned it also needed £100m to cover some wayward selling of payment protection insurance. The Co-operative was a small bank which attempted to expand too fast. It got excited and took a leap of faith it just forgot to take a look first.
Published on Jan 6, 2014