2:30PM New York – European leaders offer bank loan support plans that add to €1.15 trillion and intend to take direct stake in banks.
Over the weekend, European leaders met in Paris to discuss common action and a broader framework at approach in the region that covers fifteen nations that use a common currency euro.
Even though, political leaders in the Paris meeting agreed on a broad framework of capital injection in banks and banking system the initial steps appear to bolster advantage for national banks.
The fifteen nations compete in Euro-wide region to attract bank deposits and politicians want to make sure that national champions are not disadvantaged in the current regional bailout. Ireland and Germany guaranteed all deposits at local bank branches and UK raised its limit to 50,000 pounds.
Germany and France Offer €860 Billion
Germany committed €400 billion to support its banks and may commit as much as €100 billion and invest directly in banks. Of which, up to eighty billion euros may be invested directly in banks and €20 billion to cover loan losses.
France pledged €360 billion for the bank rescue package of which €40 billion euros will be available to take direct stake in banks and the rest to provide loan guarantees. The size of the package for France was surprising considering relatively low French bank exposures to the mortgage markets in the U.S.
Spain in what it described as ‘precautionary measures’ approved €100 billion in bank loan support program and authorized government to take direct stake in banks.
Dutch government will offer €200 billion interbank lending support to an Austria will purchase up to €85 billion illiquid mortgage securities. Italy did not commit any specific capital amount but said that it will guarantee bank debts of a certain kind and purchase preferred stock in banks.
Central Banks Offer Unlimited Liquidity
The Federal Reserve, European Central Bank and the Bank of England in a coordinated move agreed to provide unlimited liquidity for short term dollar loans with maturity of seven days. The joint move is designed to unlock interbank lending market and keep short term loans markets between banks and companies function smoother. The interbank lending rates in London did drop b7 percentage points but still hovered near 4.75%, substantially above 1.5% rate offered by the U.S. Treasury.
UK Takes Stake in HBOS and RBS
UK banks appear weaker than first anticipated.
The UK through its Bank Reconstruction Fund will inject in Royal Bank of Scotland £20 billion, £15 billion in common and £5 billion in preferred stocks in exchange for 63% stake in the bank. The stake is valued at 65.5 pence and the government will appoint three independent board directors, including Prime Minister Gordon Brown.
All directors pay and bonus will be paid in stocks to align their interest with that of the company and taxpayers.
UK will invest £17 billion in HBOS and Lloyds TSB Group Plc. After the merger between the two financial institutions, HBOS will receive £8.5 billion and £4.5 billion in Lloyds. The government will also invest £4 billion in preferred stock in the merged institution.
Chief executives and chairmen at RBS and HBOS will step down.
HSBC announced on Friday that it has raised £750 million from private investors and Standard Chartered confirmed that it meets capital requirements. Barclays Plc plans to raise £6.5 billion without the help of the government.