Call it a lucky break for Japan or proof that markets tend to correct themselves eventually. Either way, the yen has suddenly started to shed its status as a safe haven currency.

But he raises two other important issues. First is the form of the fee. The weekend press raised our concerns in this regard (see yesterday’s email) but Peston goes further with talk of “participating preference shares” and how “if the fee were set high, the Government’s economic interest in these banks – its claims over the banks assets – could approach 100 percent”. Peston continues “in the sense of rights over the banks’ profits and assets, there would be nothing left for Royal Bank’s and Lloyds’ private sector shareholders”.

Despite these rather dramatic statements, there is no further detail. From our perspective, participating preference shares can take any number of forms but are often designed to payout a fixed dividend payment (i.e. coupon) with entitlement to additional dividends in the event ordinary dividends exceed a certain level. Given the potential for such instruments to effectively dilute existing shareholders in these banks, it is absolutely necessary that these statements are clarified as soon as possible. For now, we view this as a negative development, although note Peston’s closing comments that the Treasury and banks are still looking at ways to avoid “economic nationalisation”. Furthermore, the broader press this morning continues to run with stories that the fee might take traditional preference shares or cash.

So, why the debate? On the one hand, it could simply be last minute negotiations to get a better deal for shareholders. More concerning, banks might be looking to put lots of “non-toxic” structured assets into the ringfence, such as AAA RMBS which attract risk weights as low as 7%. Why would they do that? The only reason we can think of relates to the potential for future downgrades increasing the associated risk weighting (e.g. a BB asset gets a weight nearer 450%). This would not be great as while it pre-empts a potential future problem, it might push the starting capital ratio lower – and perhaps suggests that bigger problems lurk in the capital base than is generally accepted by the market.

Two of the three largest banks in Sweden at the start of the 1990s – SE Banken and Svenska Handelsbanken – were not nationalised. It is true that SE Banken did formally request State capital support in 1993 but in the end it recapitalised without State support. SHB did not ask for, nor did it receive, State capital.

In fact the latter two bank systems underwent a much more extensive bank nationalisation process than Sweden and was arguably less successful.

So what was the cost of the banking crisis? In terms of lost output over 1991-93, it was c4.5% of GDP (see Figure 11). However, unemployment quintupled during the 1990s and never returned to previous lows (see Figure 12). The direct cost to the State budget of capital injections was SKr61 billion or 4.2% of GDP, though the net fiscal cost was reduced by asset divestments.

Policy-makers in the UK and around the world are deploying the tools we have
available to counter the negative impact of the global financial crisis and the big
shocks to confidence last autumn. That includes a very significant relaxation of
monetary policy, which we have been able to use more aggressively than in past
recessions because of the absence of underlying inflationary pressures. Measures have also been taken by governments around the world to recapitalise and stabilise the
banking system and relax fiscal policy.

So while the short-term prospect is not good and we will see further falls in output
and rises in unemployment, I believe there are good grounds for expecting a recovery
both here in the UK and in the global economy more broadly as we move through this
year and into 2010.