Banks bailed out again as RBS faces £28bn loss

As RBS faces the biggest ever UK corporate loss, the Government is pumping more capital into our banks...

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Last Updated: 31 Aug 2010

The Government has announced a second banking bailout, in its latest attempt to get credit circulating around the UK economy again. The latest scheme will effectively insure the banks against heavy losses, thus giving them more freedom to lend money to businesses and consumers. Clearly some banks are worse off than others – notably RBS, which shamefacedly admitted today that it could be as much as £28bn in the red. But this looks like an admission that previous Government efforts have failed to break the credit logjam – and may even have made it worse...

As part of the deal, we now own a bigger stake in RBS (oh good, we hear you cry). The battered bank confessed this morning that it was likely to make a loss of up to £28bn in 2008 – £8bn of write-downs on its dodgy assets, plus another £15-20bn ‘goodwill impairment charge’, which largely relates to its disastrous acquisition of ABN Amro. That would be the largest corporate loss in British history, by quite some distance (Vodafone’s £15bn in 2006 looks like chump change by comparison). The inevitable consequence is more state support – it’s agreed to swap the Treasury’s preference shares for ordinary shares, increasing the taxpayer’s stake to about 70%. This will save RBS £600m in repayments; in return, it’s agreed to boost lending by £6bn.

Quite how this sum works is beyond us, but the point is that the Government is desperate to get banks lending again – hence the new rescue package. The idea is that banks will come clean about their most toxic assets, and the Government will then insure a portion of their possible losses in exchange for a fee (to be agreed on a case-by-case basis). It’s basically like insuring your car: if you crash into a wall and write it off, Ronaldo-style, you pay an excess but the insurer steps in to cover the rest of the cost. Admittedly in this case the banks will have to cover a portion of the total, but it still means their potential liability is lower – which theoretically frees up more cash for loans.

In addition, the Government is also extending the Credit Guarantee Scheme, insuring high-quality asset-backed securities, and expanding the Bank of England’s Special Liquidity Scheme. The Treasury can’t say how much all this will cost yet – until the banks come clean about the dodgy assets on their books, it won’t know. But we can safely assume that the answer will be ‘a lot’. And it all looks like a tacit admission that its previous tactics – on the one hand forcing banks to boost their capital ratios and issue expensive preference shares, while at the same time demanding that they lend more money – were essentially contradictory.

Northern Rock has seen the most obvious volte-face. The nationalised lender had been running down its mortgage book to pay off the state loan – but this just sucked lots of mortgage finance out of the market, making matters worse. Now it’s going to halve its redemption rate to 30% - in other words, offer more customers a remortgage deal.

Hopefully the effect of this latest bailout will be to make lending easier, not harder...


In today's bulletin:

Banks bailed out again as RBS faces £28bn loss
Rightmove hints at housing market recovery
Big beast Clarke back in Business
Tough break for KPMG staff
UK plc forced into service

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