2008 United Kingdom Bank Rescue Package - The Rescue Plan

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 further £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 and it’s absolutely extraordinary that a government has been driven by events to today's announcement"; in addition to offering opposition support for the plan.

Also on the 8 October 2008 there was a strategic and co-ordinated global effort by seven central banks to calm the current financial crisis, by cutting interest rates by 0.5%. The banks were all members of the OECD and included The Bank of England, The European Central Bank and the U.S Federal reserve along with central banks in China, Switzerland, Canada and Sweden. In a reaction to the move, European stock exchanges began to recover from the losses they had made after trading had opened. The decision to make the cut came after exchanges in the Far East closed on a day of heavy losses.

The British rescue plan differs from the $700bn US bailout formally entitled the Troubled Asset Relief Program (TARP), in that the £50bn being invested by the UK Government will see them purchasing shares in the banks (which in the future could see a return being made to the taxpayer), whereas the American program is primarily devoted to the U.S. government purchasing the mortgage backed securities of the American banks which are not able to be sold in the secondary mortgage securities market. The U.S. program does require the U.S. government to take an equity interest in financial organisations selling their securities into the TARP The U.S. programme therefore does not address the fundamental solvency problem faced by the banking sector, but rather is aimed at tackling the immediate funding shortfall; the UK package tackles both solvency, through the £50bn recapitalisation plan, and funding, through the government guarantee for banks' debt issuances and the expansion of the Bank of England's Special Liquidity Scheme.