Shares rise after £37bn bailout
Markets today rebounded after the Government unveiled a revolution in banking with a £37bn bailout for three of the UK’s biggest banks.
The FTSE 100 Index pulled out of its tailspin as investors welcomed dramatic plans to pump billions into the banking industry.
Royal Bank of Scotland (RBS), which owns Ulster Bank, is to raise £20bn — with the Government buying £5bn of preference shares and underwriting £15bn of ordinary shares.
A further £17bn of taxpayer cash will be injected into HBOS and Lloyds TSB.
The announcement means taxpayers will end up owning about 60% of RBS and about 40% of the merged Lloyds TSB and HBOS as part of the extraordinary measures from the Government to prop up the beleaguered banking system.
RBS's under-fire boss Sir Fred Goodwin, who asked investors for £12bn earlier this year to help shore up the group's balance sheet, is to step down.
Banking shares in London were among the risers today as investors responded well to the Government plans. The FTSE 100 opened 200 points higher at 4132, a gain of 5%.
Shares fell by 9% on Friday at the end of the market's worst week since the 1987 crash.
Markets in Europe also enjoyed similar gains today after nations agreed a raft of emergency measures designed to ease the credit crunch.
Chancellor Alistair Darling said today that the Government was injecting “very substantial sums” into the banks in order to stabilise the system.
“It is necessary because we are going through quite extraordinary circumstances the world over,” he said.
“I believe that what we are doing will help, it will go a long, long way to reassuring people.
“There is a lot of turbulence to go through yet, there are a lot of bumps along the way, but I believe that this first step will help in two respects.
“It makes our banks strong and it is beginning to making the lending process easier.”
Mr Darling said the Government was appointing three directors to the RBS board and two to Lloyds TSB.
It also emerged that HBOS will raise £11.5bn of additional capital, including £3 billion through preference shares with the UK Government.
Barclays said it is not turning to the Government for emergency funding, unveiling instead plans to raise more than £6.5 billion from investors to help shore up its balance sheet.
As part of the plans revealed today, the Government has pledged to review the remuneration of senior executives – both for 2008, when it expects no cash bonuses to be paid to board members, and for long-term incentive schemes.
The Government will have a say on the appointment of independent non-executive directors and on dividend policy.
Banks have also been told to commit to offer competitively-priced lending to homeowners and small businesses. They will also offer support for schemes to help people struggling with mortgage payments to stay in their homes.
The announcement comes in the wake of the Government's £500 billion scheme to stabilise the UK's banking sector last week.
HSBC has already announced separate capital-raising measures in order to boost its UK operation. The Government already controls two significant mortgage lenders, Northern Rock and Bradford & Bingley.
Today's developments come after EU leaders signed up to to Gordon Brown's blueprint for recovery.
The announcement, after an emergency summit of eurozone countries in Paris yesterday, was seen as a personal victory for the Prime Minister.
Opposition from senior figures such as German Chancellor Angela Merkel had stymied joint progress before. But further market dives appeared to focus minds, and the group pledged to guarantee lending between banks, and step in with state funding to prevent financial institutions collapsing.
The US came on board with similar action over the weekend, after Mr Brown and Chancellor Alistair Darling set out their proposals last week.
Mr Brown praised the eurozone measures as the best way of restoring “confidence” to the shattered international system.