New Bank Deal Hammered out; ECONOMIC CRISIS Week of Turmoil Sparks Action

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Byline: Graeme Evans

A MULTI-BILLION pound bail-out that could leave the Government with major stakes in some of the country's biggest banks was being hammered out last night.

Treasury officials and bank executives are reported to be working towards an announcement on the pounds 50bn capital-raising plan before markets open today.

Royal Bank of Scotland and HBOS are expected to lead the way with proposals involving the issue of ordinary shares, underwritten by the Government.

Existing investors will be able to buy the new shares, but any not taken up will result in the Government holding substantial shareholdings in both firms.

It is thought RBS wants the Government to underwrite a pounds 20bn cash call to investors, while mortgage lender HBOS is requesting up to pounds 12bn.

The proposals come less than a week after the Government unveiled a pounds 400bn package aimed at recapitalising the banks and encouraging firms to lend to each other again.

The talks have been accelerated after heavy falls on world markets last week, including a 61% drop in the value of RBS to less than pounds 12bn. There was speculation last night that banking shares could be suspended today so traders are able to digest details of the announcement.

The original plan by the Government involved taking preference shares in the companies, which would pay a dividend and rank above ordinary shareholders in any break-up.

However, the proposals will now also see ordinary shares offered to investors, ensuring the banks get the cash they want. Any shares taken by the Government will be placed in a newly created bank reconstruction fund that would hold the stock until market conditions improve.

The Government's assistance will be in return for pledges from banks that they curb executive pay and resume lending to individuals and small businesses.

It may also insist on boardroom representation.

Bank of England governor Mervyn King has reportedly told the banks to ask for more than they need, meaning their capital position would be strengthened sufficiently to absorb further shocks and a long recession. …