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Rescue plan due in hours

• Robert Peston
• 7 Oct 08, 06:47 PM

The Government is poised to announce details of a comprehensive rescue package for the banking system.

It will include a proposal to inject capital into banks and to provide a standby facility to ensure our big banks have enough cash to fund their day-to-day operations.

In a UK context, this is a very big moment.

It is the government's attempt to stabilise our banking system.

I'll file more as and when I have more detail.

UPDATE: 20:03

As I said this morning, the amount of capital to be invested in our banks by the Government on behalf of taxpayers will be up to 拢50bn - which is what most analysts estimate is needed by the British banking system.

And there will also be a promise that if any bank has difficulty raising funds from wholesale markets - which remain chronically seized up - the authorities will fill the gap.

I presume that will require the Treasury to provide additional financial help to the Bank of England (that's more taxpayers' wonga), since the Bank of England's balance sheet is probably not big enough to fill our banks' wholesale funding gap on its own.

These are big sums of our money being put at risk to stabilise the financial system. It matters to all of us that the ambitious works - not least because the reluctance of our banks to lend to companies and households is sending the economy into recession.

For what it's worth, one banker - who runs one of our biggest banks - tells me that he is optimistic that it will bring a bit of calm to the extroardinarily turbulent banking market.

It's also a big moment for the Prime Minister, Gordon Brown. This is the first genuine, full-scale economic crisis he has had to face since he entered government, as chancellor of the exchequer, in 1997.

His place in history will depend on whether taxpayers' cash is being used to slow or stem the downward spiral in the economy or whether this is good money disappearing down a deep black hole.

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Banks' most pressing problem

• Robert Peston
• 7 Oct 08, 10:02 AM

A shortage of capital is a big issue for banks, as I've been blathering on about for days (and see my note of this morning on our banks' meeting with the chancellor and request for a capital injection from taxpayers).

But the really urgent issue is the breakdown of wholesale markets, and the increasing difficulty that almost all banks are having in funding themselves on a day-to-day basis.

The basic problem is that the collapses of Lehman and Washington Mutual have made all financial institutions wary of lending to any bank where there is even a scintilla of risk.

It turns out, therefore, that and the were probably wrong in allowing them to fail.

But that's spilt milk.

The more important point is that, across the globe, there are very few banks that are finding it easy to raise money from wholesale sources.

In other words, all this fuss about insuring retail deposits is beside the point.

We all know that governments won't allow retail depositors to lose money - so that's not something to worry about.

A far bigger concern is that most banks are suffering a progressive erosion of the money they receive from other financial institutions.

To date, that's been replaced by colossal loans from the authorities.

In the case of the UK, the and the have collectively provided well over 拢200bn of incremental lending to our banks over the past year.

It's what I've described as nationalisation by stealth.

But all governments will probably need to do more.

What the Irish government did, in guaranteeing both retail and wholesale deposits in their banks, may turn out to be something of a model for Europe-wide action.

What we may need is a cast-iron pledge from all European governments that they will fill whatever funding gaps emerge at their respective banks from the seizing up of money markets.

It's probably the best outcome that can emerge from today's meeting of European finance ministers.

Bankers all across Europe are watching this meeting, and keeping their fingers and toes crossed, that the finance ministers understand how fragile they are - and that the finance ministers will pledge to keep them afloat, whatever the apparent strain on public-sector balance sheets.

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Banks ask chancellor for capital

• Robert Peston
• 7 Oct 08, 07:00 AM

When Treasury officials started working overtime last week on an emergency plan to inject new capital provided by taxpayers into our banks, the chancellor wasn't sure how our banks would react.

Would they proudly tell him to hop off?

Or would they put out the begging bowl?

Well last night a trio of the UK's biggest banks - Royal Bank of Scotland, Barclays, and Lloyds TSB - signalled to Alistair Darling that they'd like to see the colour of taxpayers' money rather quicker than he might have expected.

According to bankers, these three were disappointed that at a private meeting last night with Darling, held at his request, he didn't present to them a fully elaborated banking rescue plan.

One banker told me that what he called the Gang of Three of Barclays, RBS and Lloyds TSB told Darling to pull his finger out and finalise whatever it is he's eventually prepared to offer on taxpayers' behalf.

On paper, Lloyds TSB, RBS and Barclays don't have a pressing need for additional capital.

But they have become concerned that they are being weakened significantly by investors' perception that they are short of capital and their balance sheets need to be strengthened.

Also at the meeting were Mervyn King, Governor of the Bank of England, and Adair Turner, chairman of the Financial Services Authority.

And although the other big banks were represented, it was the chief executives of Lloyds TSB, Royal Bank of Scotland and Barclays - respectively , and - who formed a tightly-knit caucus and gave urgent focus to the discussion.

The three banks estimate that they may need around 拢15bn of new capital each, with 拢7.5bn paid up front and a further 拢7.5bn guaranteed by the Treasury that would be delivered if it became necessary.

Current rough estimates are that the capital injection could be as much as 拢50bn in total for all British banks.

As yet however, there has not been any detailed negotiation with the Treasury on the amount of taxpayers' money that may be invested in them.

There is no precedent in the UK for taxpayers to take such significant stakes in banks.

The Treasury has been working on a rescue plan along those lines, as I disclosed in my note on Saturday.

The three chief executives will talk again today, so that they can establish a common position, in advance of any further negotiations with the Treasury on a rescue package.

The Treasury's current thinking is that it would acquire preferred stock in the banks, that wouldn't carry voting rights. But it would also take warrants over the ordinary shares, which is a device for ensuring that taxpayers would benefit if the banks' share prices were to rise.

However, the chief executives also told Darling that a capital injection of this sort would not be enough to stabilise the banking system.

The steady withdrawal of funds by other financial institutions, the collapse of the wholesale funding market, remains a serious problem - which probably can't be solved by the Bank of England continuing to provide ever greater loans against an ever wider range of collateral.

In the next couple of years, many tens of billions of pounds of asset-backed securities have to be paid off or redeemed by British banks. So the banks want a commitment from the government that it will lend to them, whether or not they have collateral of the sort demanded by the Bank of England, to allow them to redeem these bonds.

The banks are not looking for a formal guarantee from the Treasury that it will protect wholesale depositors, which is what the Irish government gave to Irish banks, but they would like a formal pledge that it will fill any funding gap created by the steady ebbing away of wholesale funding

If such a commitment were not forthcoming, confidence in one or more British banks may continue to ebb away, to a potentially lethal extent - or so the banks fear.

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