UK Banking Stabilisation Measures - March 2009 Update
By: Claudia Harrison, Katie Hillier
1. Introduction
Since our reports in the December 2008 and January 2009 editions of this newsletter, the UK government has released further details on several initiatives intended to combat the current economic downturn, and a number of UK based banks have announced their participation in the initiatives. In addition, the Banking Act 2009 received royal assent on 12 February 2009.
2. Update on Existing Measures
2.1 Special Liquidity Scheme ("SLS")
This scheme, which enabled banks to borrow liquid UK treasury bills in return for security over their illiquid assets, closed on 30 January 2009. The Bank of England ("BoE") have confirmed that use of the scheme was considerable: 32 institutions borrowed £185bn in return for £287bn of collateral, mainly residential mortgage-backed securities and residential mortgage covered bonds.
2.2 Bank Recapitalisation Scheme
On 7 March 2009, following recent falls in Lloyds Banking Group's share price and the release of Halifax Bank of Scotland's 2008 results, the UK government announced that its £4bn of preference shares in the Lloyds Banking Group will be converted into ordinary shares, which could increase the government's holding in the bank from 43.5% to 65%.
3. New Measures
3.1 Asset Purchase Facility ("APF")
This commercial paper facility has been operational since 13 February 2009, and the BoE is in the process of consulting in relation to facilities to purchase corporate bonds, paper issued under the Credit Guarantee Scheme (under which the UK government issued guarantees in respect of certain debt instruments), syndicated loans and asset-backed securities created in viable securitisation structures. Further, on 5 March 2009 the UK government authorised the BoE to use the APF for monetary policy purposes (including quantitative easing), giving permission to finance asset purchases using central bank reserves. UK government debt, purchased in the secondary markets, has been added to the list of eligible assets, and purchases up to £150bn have been authorised, although at least £50bn of this should still be used to purchase private sector assets, as initially intended.
3.2 Asset Protection Scheme
Under this scheme, the UK government will 'insure' banks against losses on their riskiest assets. Both the Royal Bank of Scotland ("RBS") and the Lloyds Banking Group have announced their intentions to participate in this scheme, in respect of assets totalling £325bn and £260bn respectively. RBS will pay a £6.5bn fee and bear a first loss of up to £19.5bn, with Lloyds Banking Group paying a fee of £15.6bn and bearing a first loss of up to £25bn. In order to support wider economic recovery, RBS and Lloyds have given lending commitments for 2009 of £25bn and £14bn respectively. In response to political and popular pressure, the UK government has also secured assurances relating to remuneration policies in these banks. What such assurances amount to is not yet known. Lloyds, for example, has agreed to review its remuneration policies and implement changes needed to ensure its policies comply with the Financial Services Authority's (“FSA”) guidance in this area. Whether this will produce substantive changes to policies remains to be seen.
4. Banking Act 2009 (The "Act")
The Act is in substantially the same form as the bill which was presented to parliament last October (and referred to in the December edition of this newsletter); however some important amendments were made as the bill progressed through the legislative process and are incorporated in the legislation, which was passed on 12 February 2009.
4.1 Reverse Transfers
Under the Act, the Treasury or the BoE (as applicable) can order that shares or property of a bank which have been transferred to a bridge bank or into temporary public ownership be transferred back to the seller even if the shares or property have been subject to subsequent onward transfers. This flexibility was introduced as the UK government considered the time and information available prior to taking over a failing bank may not be sufficient to allow detailed due diligence of every part of the bank's business.
4.2 Parent Companies
Following consultation with the FSA and the BoE, the Treasury may now take a UK-incorporated parent company of a bank into temporary public ownership, provided that the powers for dealing with failing banks under the special resolution regime have been triggered. Once under public ownership, the Treasury will have the same powers in respect of the parent company (and the banks within its group) as it would have in respect of the bank itself, including the ability to make forward and reverse transfers as well as appoint, remove and vary the service contracts of directors.
4.3 Investment Banks
The Treasury may now adopt regulations to modify the application of insolvency law to, or establish a new insolvency procedure for, investment banks. The Treasury can specify whether an institution is considered an investment bank for the purposes of such regulations, provided that it holds client assets and is authorised under Financial Services and Markets Act of 2000 to carry out a "regulated activity".
5. Conclusion
The UK government hopes that the combination of purchasing assets together with providing guarantees and insurance will free up the credit markets for commercial and retail lending. They are also attempting to deal with recent bonus and transparency issues by setting compliance with remuneration and disclosure policies as conditions to participation in certain schemes. Whilst the statutory regulatory regime introduced under the Act has been hailed as the biggest shake up of the industry in a decade, it grants the UK government significant powers in relation to troubled banks which many commentators consider unnecessary and enables support which is given to the banks to be kept secret. With the UK government now having majority stakes in two major high street banks, other global banks such as HSBC seeking to raise large amounts of capital through their existing shareholders, and reports that the level of national debt is equal to GDP, the jury is out on whether these latest measures will achieve their aim of improving market trust and confidence.
