Courtesy of JP Morgan. It seems to have been written ahead of the official statement from HM Treasury, but it’s not far off.
Step 1. Inject a minimum of £38bn in capital. (Done, only it’s £50bn).
That minimum figure being based on these capital shortfalls:
Capital injection would be at a 50 per cent discount to the share price, implying government ownership of 46 per cent at Barclays, 56 per cent in Lloyds/HBOS and 62 per cent in RBS, according to JPM.
Interestingly, the £50bn capital injection announced this morning could boost the tier 1 capital target to 8 per cent, based on JPM’s model, potentially providing a much more stable banking system. It does however, pose certain risks for the Treasury:
Step 2. Creation of Good Bank/Bad Bank. This hasn’t been mentioned by the government yet, but is JP Morgan’s suggestion as a logicial second step after capital injection. JPM sees about £300bn of “bad assets” (derived mostly from UK mortgage books and corporate loan portfolios):
By removing c.£300bn of customer loans the UK government could effectively de-leverage the banking system, reducing capital requirements, improving wholesale funding and at the same time protecting the remaining structure of the balance sheet. From an equity perspective, this would imply a revaluation of assets which we estimate would result in a write-down to existing shareholders funds of c.£11bn or 18% of existing NAV. We recognize the government is unlikely to have had the time to deal with this issue in such short notice, but believe this will be a necessary step to avoid second-wave effects of balance sheet de-leverage. It would also mean that for the same £38bn of capital injection, the new banking system would automatically reach a 10% core Tier 1.
So that £50bn could go even further. Hmmm.
Related links:
The VERY special liquidity scheme - FT Alphaville
