||What's it for?
||Northern Rock loans agreed by Chancellor following advice from Bank of England ("BoE") and Financial Services Authority ("FSA")
||Overnight loans, secured against mortgage book. It was stated by the FSA that "The FSA judges that Northern Rock is solvent, exceeds its regulatory capital requirement and has a good quality loan book."
||Northern Rock sourced 75% of finance from Capital and securitization markets and had limited savers deposits. Due to the freezing of the credit markets Northern Rock could no longer borrow in the LIBOR markets at a rate below its mortgages and therefore couldn't finance it's positions.
||Capital Requirements Directive ("CRD") and Depositor Protection
||The CRD was introduced to consider how banks and credit institutions would reflect the risks inherent in their business and was the start of a series of issues considering amending how financial stability is measured. The FSA also published a review of depositor protection in light of events.
||Lloyds of London chief Ron Sandler appointed as CEO, shareholders have recently petitioned the courts that the nationalisation was illegal, the UK government agrees to safeguard customer deposits up to £50,000.
||Northern Rock nationalised
||Following advice from the FSA and Goldman Sachs International, it was announced that "The Government has today decided to bring forward legislation that will enable Northern Rock Plc to be taken into a period of temporary public ownership". This was achieved through emergency legislation in the form of the Banking (Special Provisions) Act 2008 The government will be entitled to any proceeds from the sale of the business.
||The nationalisation occurred after offers to buy Northern Rock by a Virgin Consortium and through a Northern Rock led restructuring failed in November and December. It was stated that the private sector solution looked greater risk than a public takeover, because of the scale of the subsidy needed to supplement the bids. Former Lloyds of London chief Ron Sandler was appointed as CEO on £90,000 per month. Shareholders have recently petitioned the courts that the nationalisation was illegal and infringed their rights.
||Special Liquidity Scheme
||BoE announced that banks would be allowed to swap 'high quality mortgage-backed and other securities' ("ABS and MBS") for UK Treasury Bills. 8 banks to have access to the fund Abbey National PLC, Barclay's PLC, HSBC, HBOS, Lloyds TSB Bank, Royal Bank of Scotland, Nationwide building society and Standard and Chartered Bank. Banks required to meet Tier 1 capital ratio requirements. This would involve sourcing capital from the Treasury (interest bearing preference shares) Banks would still have to face any losses on their loans. Banks will also only be allowed to swap ABS/ MBS on assets pre 2007 to stop this being used as a credit scheme. The banks would be obliged to pay a fee for the swap based upon 3 Month LIBOR. Banks would also be obliged to provide collateral to the BoE greater than the value of the Treasury Bills and rated AAA by a credit agency. If this collateral saw a downgrade by a ratings agency (Moody's, Fitch etc) the Banks would be obliged to offer higher quality collateral. In this sense the credit risk remains with the Banks.
||These swaps would have tenors of 1 year with the option to renew the agreement for up to 3 years. The government offered a 6 month window for applications to the Scheme. There has also been a subsequent arrangement in February 2009 for a Discount Window which further extends the Scheme.
||Special Liquidity Scheme (follow up)
||BoE announces that the period for applications will be extended to 30 January 2009
||40bn USD (first auction)
||Co-ordinated World Action
||BoE announced that it would provide $40bn to increased credit in the overnight dollar markets (lending markets for short term credit). These loans would be collateralised against suitable assets.
||This was a joint proposal from the Bank of Canada, the Bank of England, the European Central Bank (ECB), the Federal Reserve, the Bank of Japan and the Swiss National Bank. The money would be released in fixed tranches in $40bn auctions to eligible institutions.
||Bradford and Bingley
||The assets and liabilities of the Bank (Mortgage loan book, staff, treasury assets and its wholesale liabilities) were taken into public ownership through the re-allocation of shares to the Treasury. The government would be entitled to the proceeds following the realisation of the assets of the remaining business of Bradford & Bingley.
||The bailout followed £400m rights issue, which was undersubscribed and left the bank to turn to the UK government. Part of the proposal saw The Treasury release £14bn to allow Abbey to take on retail deposits of the Bradford and Bingley under the scope of the Financial Services Compensation Scheme ("FSCS"). This £14bn was sourced through a loan from the BoE with an initial term of three years at one-year LIBOR plus 32 basis points for the first 3 years and Libor plus 100 basis points for the following years.
||Credit Guarantee Scheme and Bank Recapitalisation
||50bn of taxpayers' money will be offered to banks to rebuild their capital reserves and £250bn to underwrite lending between banks. This scheme was set up with an initial period of 6 months, but the ability to extend the proposal reserved. Debt would be for a maximum 36 month tenor. The Scheme would be managed by ensuring that banks applying would need a total tier 1 capital ratio of at least 8% and a core tier 1 capital as defined by the FSA of at least 4% for those companies in stressed or distressed state.
||The government aimed to provide short term liquidity, while providing capital to maintain Tier 1 capital ratio and ensure that banks met sure term credit agreements. A special advisory body would be set up to manage the governments interests in both RBS and Lloyds HBOS. This would be distinct from the governments normal operations and formed with the express intent of maximising the public investments. This company UK Financial Investments Limited ’ (UKFI), was set up on 3rd November 2008. The government re-iterated that these were temporary holdings.
||Purchase of £15 bn plus £5bn preference shares to take ownership to 57.9%. The bank will pay no dividends to ordinary shareholders until it had repaid the government debt. Both banks would have to maintain lending to homeowners and small businesses at 2007 levels for 3 years. There would also be an obligation to help those struggling with mortgage payments, caps on remunerations (2008 only) and appointments to the Board to be agreed by the government.
||The government expected to release £100bn by the end of 2008.
||As Lloyds rescued HBOS it borrowed funds from the government to maintain it's capital ratio. This will give the government a 43.4% stake in the new company. Lloyds agreed to suspend payment of cash dividends until preference shares were repaid.
||It was further announced that the UK would be prepared to "supply dollar liquidity to the banking system against collateral at a pre-set price with no fixed limit on the amount."
||Guarantees on IceSave and other Icelandic banks
||To protect their interests the government made an Order to freeze funds owned, held or controlled by Landsbanki.
||The guarantees on UK depositors in IceSave and other Icelandic institutions was set to cost c£2.2bn of taxpayers money
||RBS - Preference shares converted to ordinary shares
||This move was to ensure that RBS Tier 1 Capital Ratio further improved and aimed to facilitate a further £6bn in lending from the bank.
||RBS further agreed to commitment to maintain lending to large cooperates for 3 months.
||Asset Protection Scheme
||The most recent announcement was effectively an unlimited guarantee from the government on credit losses on their assets. The government will charge a 'fee' for this privilege. There will be an agreed "first loss" when the protection kicks in with each institution expected to retain a 10% exposure to the loss to ensure they do no lean on the state. Only institutions with £25bn of assets will be eligible to reduce credit and counterparty risk.
||Only certain assets are eligible notably: residential and commercial loans, ABS and certain corporate and leveraged loans. The Scheme is expected to be in place for at least 5 years and the "first loss" and fee will be on a case-by-case basis.
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