T he British Government has aggressively sought to resolve problems at the banks through a mixed system of capital injections and asset guarantees. A fter recent mergers, four large banks remain: Barclays, HSBC, Lloyds Banking Group, and RBS.
T wo of these banks, Barclays and HSBC, have raised capital privately. T he U.K. government has introduced a mixture of bank recapitalizations and asset insurance for the other two banks. I n October 2008, the government injected capital into RBS and Lloyds by purchasing preferred shares with a high return of 12 percent.
T he banks also halted dividend payments. I n January 2009, as an effort to boost the banks' lending, the interest on the preference shares was reduced to 5 percent and the RBS preference shares were swapped for ordinary shares, increasing the government stake in RBS to 70 percent. I n exchange for capital injections, the government elicited a promise from the banks that they would sustain at 2007 levels, their lending to smalland medium-size enterprises and households. W hether they have done so is controversial. On February 26, 2009, the government agreed to inject into RBS 25.5 billion as capital and guarantee assets of 325 billion, increasing the government’s ownership to near 95 percent. For Lloyds, the government agreed to insure up to 250 billion of assets, already holding a 43 percent ownership stake; on March 7, the government agreed to insure an additional 260 billion, pushing its likely ownership toward 75 percent.
T he asset guarantees are through the Asset Protection Scheme, a program to «provide protection against credit losses occurring on specified pools of assets above a certain threshold.» How to evaluate the propriety and wisdom of the U.K. government’s actions? We focus on several aspects:
1. Reversing the perception of extreme counterparty risk. Far from helpful, this change added to the opacity of bank balance sheets.
2. Avoiding a credit crunch to smalland medium-size enterprises by supplying capital. Policy choices are one of two: have the government provide capital that will allow the banks to operate while gradually writing down the impaired assets (but with no expectation of increased willingness to lend until they had done so) or using a government-backed «bad bank» solution to take assets off banks' balance sheets, as was successfully done in the Nordic case7. REFERENCES:ΒΉ
http://unpan1.un.org/intradoc/groups/public/documents/un/unpan006231.pdfΒ²
http://www.dfid.gov.uk/Working-with-DFID/Funding-opportunities/Business/Government-and-the-private-sector-working-together/Β³
http://www.communities.gov.uk/localgovernment/local/localenterprisepartnerships/4
http://www.myfinances.co.uk/insurance/2011/03/28/cameron-backs-new-businesses-with-startup-britain-scheme5
http://www.fundsforngos.org/bilateral-funds-for-ngos/dfid-has-funding-schemes-for-ngos/6
http://www.regional-studies-assoc.ac.uk/events/2011/april-newcastle/papers/Pugalis.pdf7
http://research.stlouisfed.org/publications/es/09/ES0916.pdf
