13 October 2008

£37bn Government Bail-out For Banks

The government has announced a £37bn bail-out for the Royal Bank of Scotland (RBS), Lloyds TSB and HBOS.

RBS has been forced to go to the treasury for a £20bn bailout. Lloyds TSB and HBOS will receive a £17bn investment of new capital.

Barclays plans to raise £6.5bn from private investors. The bank will scrap its final dividend payout for 2008, saving it £2bn.

The RBS chief executive Fred Goodwin has stepped down and chairman Tom McKillop is to retire. HBOS chief executive Andy Hornby and chairman Lord Dennis Stevenson will also stand down from their posts.

The government's move means taxpayers will own around 60% of RBS and 40% of Lloyds TSB/HBOS.

The Prime Minister said the action ministers were taking was "unprecedented but essential".

"In extraordinary times, with financial markets ceasing to work, the Government cannot just leave people on their own to be buffeted about," he told a Downing Street news conference.

"For savers, for small businesses, and for homeowners, we must in an uncertain

and unstable world be the rock of stability on which the British people can depend."

The Treasury insisted that the government was "not a permanent investor in UK banks".

"Its intention, over time, is to dispose of all the investments it is making as part of this scheme in an orderly way."

Conditions of the deal include that senior directors should get no cash bonuses this year, with future bonuses to be paid in the form of shares.

RBS and Lloyds TSB/HBOS are also to return mortgage and small-business lending to 2007 levels, which is a vast increase on current lending levels.

BBC business editor Robert Peston said: "This is hugely significant given that a shortage of credit is to a large extent behind the economy's deceleration into recession levels."

London's FTSE 100 index rose by about 5% as investors reacted to the news.

(GK/JM)