Bill Jamieson's business blog: Next step - full nationalisation of the banks?

Published on Wednesday 14 January 2009 11:01

Another day, another emergency package for Britain's banks. Today brings news of a government bank support package of up to £20 billion to help lending to small and medium sized businesses - and the appointment of a new Minister for Banking - Standard Chartered chairman Mervyn Davies.

How ironic. It seemed only the day before yesterday the government was swearing hand on heart that it had no intention whatever of getting involved in day-to-day banking matters. But words are being eaten as fast as they are spoken.

Day to day involvement is exactly what it is being sucked into as earlier massive capital injections have not worked to unclog the pipes in wholesale money markets and, critically, in bank lending to businesses.

Today's package, announced by Business Minister Lord Mandelson, is designed to prevent small and medium sized companies from going bust. Economists and industry figures have welcomed the steps to getting credit flowing again. But they say the scheme is not a panacea for an economy now mired in recession - and with the downturn worsening by the week.

The government will guarantee loans worth 10 billion as part of a new Working Capital Scheme, that could secure refinancing double that amount for companies with a turnover of up to 500 million.

In return for a fee, the state will, in effect, insure banks against firms defaulting on loan repayments.

Mandelson also launched an Enterprise Finance Guarantee Scheme, securing up to 1.3 billion of additional bank loans to firms with a turnover of up to 25 million.

Analysts questioned whether the scheme went far enough.

Says David Buik of BGC Partners, "Ten to twenty billion sounds like a huge amount of money. But in the grand scheme of the problem and the current disarray the banking sector finds itself in, a 50 percent guarantee from the government to small and medium sized businesses seems wholly inadequate."

And says Martin Weale at the Institute of Economic and Social Research, "It's been clear for months that something like this is needed. I'm not sure it is on an adequate scale. My guess is that it won't be enough.

"After a few months it will look like another of the government's half measures."

Part of the problem, is the withdrawal of once buoyant lending from overseas banks and financial institutions which the domestic clearers cannot on their own make good.

As the crisis deepens, many now expect a further wave of bank recapitalisation, a move that could see Royal Bank of Scotland and the enlarged Lloyds TSB- HBOS group becoming wholly state-owned. That is now the widespread expectation in financial markets.

The government injected billion of pounds into banks' failing balance sheets back in October but this has failed to maintain lending.

Today's news did nothing to halt a further weakening in the bank sector. RBS fell 4.3 per cent to 48.9p, HSBC slid 8.5 per cent to 585.5p and HBOS slipped fractionally to 80.5p.

Barclays was notably weak again this morning, down a further 6.5 per cent at 155.1p on top of a 10 per cent fall yesterday on growing talk that it will need to raise another 3 billion to cover the rise in bad debt charges. According to analysts at JP Morgan, Lloyds TSB/HBOS may require 13 billion while RBS could need 6 billion.

These are huge sums. But such is the pace of deterioration across the corporate sector that even higher provisions may be necessary in coming months - obliging the government to step in with yet more money to help maintain business lending.

All this poses an acute problem for Barclays. With the government holding large stakes in its domestic rivals, dealers say Barclays is particularly vulnerable to bear raids once the short selling ban expires on Friday.

The British Bankers Association, which represents the banks, said that its latest data showed that in October and November, growth in lending to small businesses slowed towards the end of 2008, though it remained above 2007 levels.

The appointment of Mervyn Davies - he had been tipped as a possible new chairman for RBS - underlines the paradox of the government's position. It wanted to be 'hands off' on banking. But events are compelling it to be very much 'hands on '. And Davies, - one of very few bankers who have survived the financial crisis with an untarnished reputation - will now be a key adviser to No 10 as the problems intensify. Good luck.

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