In case the full Treasury statement is a bit much, here are some highlights of ‘ UK bailout 2′ (our emphasis):
- UK GOVT SAYS TO OFFER PROTECTION TO UK INCORPORATED AUTHORISED
DEPOSIT-TAKERS (INCLUDING UK SUBSIDIARIES OF FOREIGN INSTITUTIONS) WITH MORE
THAN £25 BILLION OF ELIGIBLE ASSETS
- UK GOVERNMENT IS TODAY ANNOUNCING ITS INTENTION TO OFFER PROTECTION ON
THOSE BANK ASSETS MOST AFFECTED BY THE CURRENT ECONOMIC CONDITIONS
- THE UK TREASURY WILL PROVIDE TO EACH PARTICIPATING INSTITUTION PROTECTION AGAINST FUTURE CREDIT LOSSES ON ONE OR MORE PORTFOLIOS OF DEFINED ASSETS
- THE UK TREASURY’S PROTECTION WILL COVER THE MAJOR PART BUT NOT ALL OF THE
CREDIT LOSSES WHICH EXCEED THIS “FIRST LOSS” AMOUNT
- EACH PARTICIPATING INSTITUTION WILL BE REQUIRED TO RETAIN A FURTHER
RESIDUAL EXPOSURE, WHICH IS EXPECTED TO BE IN THE REGION OF 10 PER CENT
-UK TREASURY EXPECTS THE FEE WILL USUALLY BE SATISFIED BY THE ISSUE OF
CAPITAL INSTRUMENTS OF THE PARTICIPATING INSTITUTION
-THESE INSTRUMENTS ARE NOT EXPECTED TO INCLUDE ORDINARY SHARES, BUT WILL
INCLUDE A RANGE OF ALTERNATIVE CAPITAL INSTRUMENTS
-UK DMO SAYS NO IMPACT ON GILT FINANCING REMIT DUE TO NEW BANKING PACKAGE
-UK DMO: FINANCING FOR ASSET PURCHASE FACILITY TO BE RAISED BY DMO VIA BILL
SALES, CASH MANAGEMENT
-UK DMO: RESPONSIBLE FOR AUCTIONING GUARANTEES IN CREDIT GUARANTEE SCHEME
-UK DMO: FIRST GUARANTEE AUCTION WILL TAKE PLACE IN APRIL 2009, SUBJECT TO
EU STATE AID APPROVAL
-UK’S FSA – CLARIFYING THAT WE ARE OPERATING ON THE BASIS THAT WE ARE
EXPECTING EACH OF THE PARTICIPATING BANKS TO HAVE A MINIMUM CORE TIER 1 OF
4%.
Initial take from the analysts?
Marc Ostwald at Monument Securities sees it as the Bank of England essentially becoming the bad bank. As he puts it:
In effect one can argue that this makes the BoE the UK’s ‘bad bank’, even if there are some limits to the risk that is being transferred, and the £25Bn baseline also rules out the bulk of foreignn institutions (i.e. not the Santander subsidiaries).
There is going to be a crowding out effect at the ultra-short end of the curve, though it does seem to make good sense for such borrowing to be conducted at the low interest rate end of the curve.
That the Treasury suggests that the BoE can use this as a monetary policy instrument is true, given that withdrawal of such facilities would constitute a tightening of credit conditions, but this looks a sop to inflation figthing credibility, which borders on a red herring. Cynics could also argue that Brown & Darling are merely passing the buck to the MPC in terms of exit strategy.
Verdict’s still out then.