Banking bail-out

£500bn underwritten and guaranteed by the Treasury

The Prime Minister, Gordon Brown, announced on 8 October 2008 that he would make available hundreds of billions of pounds to underwrite banking debts that would be underwritten and guaranteed by the Treasury.

This unprecedented action was taken in an attempt to underpin the financial markets, prevent a complete collapse of the system and stave off a deep recession.
Taxpayers could end up becoming liable for this £500bn bail-out and some banks are likely to become partially nationalised as a result. On the same day a number of world banks, including the Bank of England, also cut their interest rates in a coordinated attempt to bring some reassurance to the global financial markets.

The Bank of England’s Monetary Policy Committee (MPC) cut the base rate by 0.50 per cent to 4.5 per cent, the biggest cut for seven years. This was subsequently followed by some of the biggest mortgage lenders reducing their variable and tracker rates. Millions of homeowners should benefit from the 0.50 per cent cut to interest rates, as the Halifax and Bank of Scotland, owned by HBOS, Lloyds TSB and Woolwich, the mortgage arm of Barclays, announced they would all pass on the full rate cut to homeowners on their standard variable rates. The new rates come into force on 1 November 2008.

Under the terms of the emergency rescue announced, the UK government will raise up to £50bn to buy stakes in at least eight banks. Taxpayers will buy specially issued preference shares in these banks, and the government has set a three-year period to recover this money. Banks will also be able to borrow higher levels from the Bank of England for short-term loans, offering credit of £200bn under its special liquidity scheme.

The Chancellor, Alistair Darling, also announced that the 300,000 UK retail Icesave savers with £5bn deposited in the Icelandic internet bank would have their deposits guaranteed even if the deposits were worth more than £50,000. Commenting, Alistair Darling said the implications for the public finances of the ‘essential’ measures were ‘exceptional and mostly temporary and will protect taxpayers by ensuring stability in the economy now.’

This was followed by warnings that more than 100 local councils, police authorities and fire services could lose up to £1bn currently held in Iceland’s bankrupt system. Charities, including children’s hospices, have also warned they could be at risk of losing £25m.