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Authors: Vincent Cable
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shares, resulting in the de facto
nationalization of Royal Bank of Scotland / NatWest and HBOS, and a minority stake in Lloyds TSB. The state preference shares
enjoy a 12 per cent interest for taxpayers who receive no dividends on the ordinary shares. Other than the interest rate,
the main attraction for the taxpayer was that the banks agreed to a (rather vague) undertaking to maintain lending and to
restrain bonus payments. The UK package was based on a similar strategy to that which was adopted in Sweden in the early 1990s
to resolve a banking crisis following a property bubble. The Swedish approach was more far-reaching: there was a guarantee
for all deposits and creditors;and there was a mechanism for separating out bad debts. But it succeeded in stabilizing the banking system, and the government
made money from the subsequent share sell-off.
The British plan for recapitalization was both more direct and more urgent than the Paulson plan and was quickly adopted as
a framework for intervention in the G7 countries. It was also accompanied by measures to guarantee inter-bank lending. The
package, particularly when adopted by other developed countries and accompanied by parallel measures such as a concerted cut
in interest rates, helped to stabilize the position, at least in the short term, though inter-bank lending remained sluggish.
It had become clear by the New Year however that, although the banking system had been saved from immediate collapse, it remained
in desperate straits, requiring continued intervention. In the USA, Bank of America had to be rescued and Citigroup was broken
up. The Irish government nationalized Anglo-Irish. The Commerzbank was rescued in Germany. The British government launched
a scheme to provide guarantees for new business lending and set out the broad framework of a programme to insure the banks’
bad debts. Investors were not impressed; shares fell drastically in RBS/NatWest, Lloyds/HBOS and Barclays in anticipation
of nationalization.
In the event, of the four biggest British banks (each of which was in the top seven in the world in terms of their balance
sheets), Barclays narrowly escaped collapse and nationalization, although it was heavily reliant on very expensive funding
from the Qatari government; HSBC floated clear of the disaster, having been considerably more restrained in its financial
practices than its peers, under the leadership of Stephen Green; Lloyds would have floated clear, but was dragged down by
the disastrous acquisition of HBOS; and RBS, the world’s biggest bank, was effectively taken over. A state shareholding body,
UK Financial Investments Ltd (UKFI), was established to manage the public interest in RBS and Lloyds.
Those interventions stabilized the banks. There has since been no further major collapse in the US, UK or other major economies(though smaller institutions, such as the Dunfermline Building Society, have failed). The nature of the problem has changed.
Banks, including the semi-nationalized banks, have lurched from recklessness to extreme caution in their lending practices,
hoarding capital (as they have been encouraged to do by the financial regulators). Solvent companies with apparently good
prospects, a goodish profile and decent order books have found their credit lines pulled or their lending conditions tightened,
causing many to fail or lay off staff, thus aggravating the recession. There is still a risk, although it appears to be diminishing,
of deepening recession. This could create more default in corporate debt, on mortgages, credit cards, car loans and commercial
property. This in turn would create more bad debt and more reason for banks to hoard capital rather than lend it. It is easy
to see how such a downward spiral could lead to a deepening slump.
The contraction of credit in some countries has been aggravated by the problems experienced by overseas banks. Several eastern
European
nationalization of Royal Bank of Scotland / NatWest and HBOS, and a minority stake in Lloyds TSB. The state preference shares
enjoy a 12 per cent interest for taxpayers who receive no dividends on the ordinary shares. Other than the interest rate,
the main attraction for the taxpayer was that the banks agreed to a (rather vague) undertaking to maintain lending and to
restrain bonus payments. The UK package was based on a similar strategy to that which was adopted in Sweden in the early 1990s
to resolve a banking crisis following a property bubble. The Swedish approach was more far-reaching: there was a guarantee
for all deposits and creditors;and there was a mechanism for separating out bad debts. But it succeeded in stabilizing the banking system, and the government
made money from the subsequent share sell-off.
The British plan for recapitalization was both more direct and more urgent than the Paulson plan and was quickly adopted as
a framework for intervention in the G7 countries. It was also accompanied by measures to guarantee inter-bank lending. The
package, particularly when adopted by other developed countries and accompanied by parallel measures such as a concerted cut
in interest rates, helped to stabilize the position, at least in the short term, though inter-bank lending remained sluggish.
It had become clear by the New Year however that, although the banking system had been saved from immediate collapse, it remained
in desperate straits, requiring continued intervention. In the USA, Bank of America had to be rescued and Citigroup was broken
up. The Irish government nationalized Anglo-Irish. The Commerzbank was rescued in Germany. The British government launched
a scheme to provide guarantees for new business lending and set out the broad framework of a programme to insure the banks’
bad debts. Investors were not impressed; shares fell drastically in RBS/NatWest, Lloyds/HBOS and Barclays in anticipation
of nationalization.
In the event, of the four biggest British banks (each of which was in the top seven in the world in terms of their balance
sheets), Barclays narrowly escaped collapse and nationalization, although it was heavily reliant on very expensive funding
from the Qatari government; HSBC floated clear of the disaster, having been considerably more restrained in its financial
practices than its peers, under the leadership of Stephen Green; Lloyds would have floated clear, but was dragged down by
the disastrous acquisition of HBOS; and RBS, the world’s biggest bank, was effectively taken over. A state shareholding body,
UK Financial Investments Ltd (UKFI), was established to manage the public interest in RBS and Lloyds.
Those interventions stabilized the banks. There has since been no further major collapse in the US, UK or other major economies(though smaller institutions, such as the Dunfermline Building Society, have failed). The nature of the problem has changed.
Banks, including the semi-nationalized banks, have lurched from recklessness to extreme caution in their lending practices,
hoarding capital (as they have been encouraged to do by the financial regulators). Solvent companies with apparently good
prospects, a goodish profile and decent order books have found their credit lines pulled or their lending conditions tightened,
causing many to fail or lay off staff, thus aggravating the recession. There is still a risk, although it appears to be diminishing,
of deepening recession. This could create more default in corporate debt, on mortgages, credit cards, car loans and commercial
property. This in turn would create more bad debt and more reason for banks to hoard capital rather than lend it. It is easy
to see how such a downward spiral could lead to a deepening slump.
The contraction of credit in some countries has been aggravated by the problems experienced by overseas banks. Several eastern
European
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