UK Government's Banking Support Measures
Part I: UK Government's Package Of Financial Support For
The UK Banking Industry ("Bank Rescue Package")
With the credit crunch rapidly deteriorating into a full-scale
global financial crisis, the UK's HM Treasury ("HMT")
announced on 8th October 2008 a comprehensive package of measures
to help support the banking industry financially and to strengthen
depositor protection, with the aim of stabilising the UK financial
system.1
The initial package of measures were approved by the European
Commission on 13th October 2008 under the state aid rules under
Article 87 of the Treaty establishing the European Community
(commonly referred to as the "EC Treaty"), which HMT
immediately proceeded to implement.
On 19th January 2009, the UK Government ("Govt.")
announced a second rescue package for UK banks,2
extending some of the existing measures as well as introducing new
ones, following renewed turbulence in bank share prices. These
further measures are aimed at stimulating lending by banks to the
economy, which the initial £400 billion bail-out package in
October 2008 failed to induce.
As part of the same initiative, the Financial Services Authority
("FSA") on 19th January 2009 issued a
statement3 clarifying its regulatory approach to bank
capital requirements as set out in its previous statement dated
14th November 20084 in relation to the initial package
of bank recapitalisation and related support measures launched by
the Govt. on 8th October 2008. In order to counteract the
'procyclical' effects of Basel II capital framework, FSA
will allow banks to measure the credit risks on their loan
portfolios on a 'through the cycle' basis rather than a
'point in time' basis and to reduce their Tier 1 capital
and core Tier 1 capital during an economic downturn to 6-7% and 4%,
respectively, of their risk-adjusted assets.
We summarise below the various measures comprising the Bank
Rescue Package (as they are currently implemented or, subject to
European Union ("EU") approval, soon to be implemented),
as well as the pending Banking Bill which is designed to reform the
UK banking regulation by addressing the issues highlighted by the
ongoing crisis.
Government Recapitalisation Scheme
("GRS")5
The GRS was launched on 8th October 2008 and enables the Govt.
to make capital investments of up to an aggregate of £50
billion in "Eligible Institutions", in order to help
increase their Tier 1 capital and strengthen their finances. These
investments may take the form of preference shares (or permanent
interest bearing shares).
"Eligible Institutions" mean UK incorporated banks
(including UK subsidiaries of foreign banks) that have a
substantial business in the UK. The initial list of Eligible
Institutions published by HMT include HBOS, RBS, Lloyds TSB,
Barclays, Nationwide, Standard Chartered, Abbey National, and HSBC.
Other UK incorporated banks may also apply to be included in the
GRS.
In return for the investment, the Govt. will require a number of
commitments from the banks concerned:
to maintain competitively priced lending to homeowners and
small businesses at 2007 levels for the next 3 years;
to support the Govt. in connection with schemes to help
struggling mortgage borrowers stay in their homes and to support
the expansion of financial capability initiatives;
for 2008, not to pay any cash bonuses to board members and
going forward, to review executive remuneration policies to link
them to long-term value creation (taking account of risk) and
restricting the potential for "rewards for failure";
to give HMT the right to agree with the board of directors on
the appointment of new independent nonexecutive directors; and
to amend dividend policies.
Pursuant to the GRS, HMT initially made investments totalling
£37 billion in the preference shares of RBS (£20
billion, amounting to a 58% holding) and of the Lloyds Banking
Group (£17 billion, amounting to a 43.3% holding) formed by
the Govt.-sponsored merger of HBOS and Lloyds TSB completed on 16th
January 2009. The intention of these investments is for both banks
to raise their Tier 1 capital ratios above 9% (compared with the
minimum Basel II requirement of 8%). The terms of the preference
shares purchased by the Govt. require payment by both banks of a
fixed 12% p.a. dividend and an undertaking not to pay any dividend
on ordinary shares until those preference shares have been fully
repaid.
In addition, these banks have committed to maintain
competitively priced lending to homeowners and small businesses at
2007 levels, and the Govt. has established a Lending Panel
comprising lenders, consumers, trade bodies, regulators and the
Bank of England (the "BOE") in order to monitor lending
by banks taking advantage of the GRS. 6
On 19th January 2009 HMT announced that it has agreed to convert
£5 billion of its preference share investment in RBS into
ordinary shares in order to boost RBS's core Tier 1 capital and
to enable RBS to increase its lending to the real economy by
another £6 billion in the next 12 months (i.e., over and
above existing commitments).7 The conversion does not
involve any injection of new capital but will raise the Govt.'s
stake in RBS by a further 12% to about 70%. A similar offer has
been extended to the Lloyds Banking Group.
HMT has repeatedly stated its intention to dispose of all its
investments under the GRS in due course. To this end the Govt. has
set up an independent holding company named "UK Financial
Investments Limited" ("UKFI") to manage its
shareholdings in RBS and Lloyds Banking Group (and any other
Eligible Institutions) on a commercial basis, in order to maximise
value for UK taxpayers.8 The Govt. also intends that
UKFI will in due course manage its investments in Northern Rock plc
and Bradford & Bingley plc, both of which banks are wholly
owned by the Govt.9
HMT has stated that "transparent arrangements" will be
implemented to ensure that its role in the investment decisions is
clearly defined.10
Credit Guarantee Scheme ("CGS")
The CGS was initially launched by HMT on 13th October 2008 as
part of the initial package of Govt. measures to support UK banks
in the face of the global banking crisis.11 Under the
CGS, HMT will guarantee, in return for a fee and subject to certain
conditions, new issuances of short-term or medium-term debt
securities by Eligible Institutions, in order to help refinance
their funding obligations. The initial uptake of this scheme by
eligible banks has been estimated to amount to £250
billion.
The CGS was amended on 15th December 2008 in light of further
market developments and the measures being implemented by other EU
member states. In particular, the amendments reduced the fee
payable by the bank to the Govt. for the use of the CGS, extended
the maximum term of guarantee to 5 years (by way of a roll-over of
the instruments) and widened the range of eligible
currencies.12
On 19th January 2009 HMT proposed to extend the drawdown window
of the CGS (during which period Eligible Institutions may issue new
guaranteed debt) from 9th April 2009 to 31st December 2009.
Thereafter, participating institutions may keep rolling over up to
100% of their guaranteed debt until 13th April 2012 and thereafter
up to one-third of such debt until 9th April 2014.13 The
final maturity date of 9th April 2014 and all other features of the
CGS will remain unchanged.
HMT's Rules of the 2008 Credit Guarantee Scheme effective
13th October 2008,14 as subsequently amended, impose the
following conditions for participation in the CGS:
Issuance Period
The CGS covers new issuances by "Eligible
Institutions," prior to 31st December 2009 ("Issuance
Period"), of short to medium term Eligible Scheme Liabilities
(as defined below).
Eligible Institutions
As under the GRS, "Eligible Institutions" are
defined as UK incorporated banks (including UK subsidiaries of
foreign banks) which have a substantial business in the UK, but
these institutions must further maintain a level of Tier 1 capital
in amount and form deemed appropriate by the Govt. (whether by
Govt. subscription or private investors) to qualify for the CGS.
Only one entity within a single banking group will be allowed to
participate in the CGS.
Eligible Scheme Liability
To qualify as an "Eligible Scheme Liability," the
debt instruments must, among other things,
be senior unsecured debt instruments with standard market terms
(whether stand-alone or off programmes), excluding any
complex instruments, which fall within one of the following
categories: (i) certificates of deposit, (ii) commercial paper and
(iii) bonds or notes;
be denominated in one of Sterling, Euro, US dollars, Yen,
Australian dollars, Canadian dollars or Swiss francs; and
have a maturity date no later than 13th April 2012, subject to
a possible roll-over of part of the guaranteed debt up to the CGS
end date of 9th April 2014 with Govt. consent.
Furthermore, the terms and conditions of the instruments should not
contain any cross-default or cross-acceleration provisions, nor any
call option for the issuer. Once approval is granted under the CGS
and the Eligibility Certificate is issued, the instruments must be
issued within 30 days and the proceeds of the issue must be applied
to refinance the institution's wholesale funding obligations as
they mature.
Payment of fees
A fee will be charged for participation in the CGS, of 50
basis points plus 100% of the bank's median 5-year Credit
Default Swap ("CDS") spread during July 2007 –
July 2008 as determined by HMT,15 payable to HMT. There
may also be an incremental fee payable for non-Sterling
issues.
If the application is approved, HMT will issue an
"Eligibility Certificate" to the applicant bank under the
CGS, which will signify that the specified instruments are
unconditionally and irrevocably guaranteed by HMT to ensure their
timely payment.16
Issuers are obliged to notify HMT of the guaranteed liabilities
which they issue under the CGS, and HMT maintains a list of such
liabilities.1...
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