The UK Government’s objective is not to acquire significant stakes in LLOY, HBOS and RBS.  Their objective is to restore market confidence in UK banks by addressing three inter-related areas which have come under the harsh spotlight of the market’s scrutiny.  These areas are :

1.  Do the banks have enough physical cash (or access to such cash) so as to be able to carry on conducting business?

2.  Will the banks be able to refinance their debts when they fall due?

3.  Do the banks have enough capital to be able to withstand likely losses and still remain in business?

The expansion of the Special Liquidity Scheme and the establishment of a Discount window at the Bank of England fully addresses point 1.  The provision of a Government guarantee for their debts provides confidence in a positive answer to point 2.  Point 3 is addressed by the Government underwriting the capital-raising issues announced on 13 October 2008.  There is clearly a hope that given that the banks now have a future, investors will step up to the plate and subscribe for most of the ordinary shares to be issued which will leave the Government with small stakes in the banks which will be sold off in the future (perhaps they will even be bought back by the banks themselves as they will likely be flush with capital in a few years time).  RBS and the enlarged-LLOY are both planning to buy back the Preference shares during 2009 so as to be able to resume paying cash dividends.

A lack of investor confidence that the banks will survive has been the focus of attention.  With this week’s 150bp rate cut by the BoE (such a decisive move is to be applauded), the BoE is well on the way to creating a steeply-positive yield curve which will enable the banks to make lots of profits (against which they can recognise their losses).  The Government has re-engineered confidence in the banks.  It is all over bar the shouting.

Related posts

• Throw More Money at the UK Banks ?!
• Swords into Ploughshares
• Tight Credit Conditions are Desirable
• Playing for Time
• Large slice of Humble Pie, please.

Tags: cash dividends, HBOS, LLOY, market confidence, preference shares, RBS, refinance debts, uk banks, UK Government, yield curve

This entry was posted on Friday, November 7th, 2008 at 3:10 pm and is filed under Sectors. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.