Bank shares plunge on day new rescue plan for companies unveiled

Published on Wednesday 14 January 2009 20:15

THE fragile state of the UK economy was underlined yesterday when bank shares plummeted on the day the government unveiled its latest scheme to help firms survive the credit crunch.

The FTSE 100 share index ended almost 5 per cent down, with shares in Royal Bank of Scotland, HBOS and Barclays – which announced 2,100 job losses for the second time in a week – among the day's biggest losers.

With bleak news from the US and fears that UK banks may have to ask the government for more money blamed for the slide, RBS suffered the biggest drop of the day, with its shares falling 18 per cent to end at 41.7p. Barclays fell 14 per cent and HBOS 13.5 per cent.

The news came despite the government announcing a package of measures to get banks lending to small and medium-sized businesses again.

Supported by government guarantees, banks will provide 20 billion of short-term loans for two years to provide struggling companies with additional working capital.

Small firms – those with a turnover of up to 25 million – will be able to apply for loans of between 1,000 and 1 million for up to a decade.

And the government is also prepared to take shares in hi-tech firms that have high levels of debt, after setting up a 75 million reserve with high-street banks.

Gordon Brown told the Commons at Prime Minister's Questions yesterday that the government was providing "real help for businesses now".

He said: "It's targeted and focused, it's funded, it's additional to what has been done before."

But the Conservatives said the scheme was too complicated and accused him of adopting a "pale imitation" of their 50 billion proposal.

There was also controversy as Mervyn Davies resigned as chairman of the investment bank Standard Chartered to become a government minister in Lord Mandelson's business department. He will be unpaid and will take a seat in the Lords.

But Labour and Tory MPs were angry that another business minister – in addition to Lord Mandelson and Baroness Vadera – would not be able to answer questions in the Commons.

Unveiling the government scheme, Lord Mandelson said he recognised that banks needed "further help and encouragement" to resume lending to businesses, either by extending existing loans or providing new credit.

"They have not responded in the way we would like," he said.

The main part of the package is a working capital scheme, in which the government underwriting 10 billion of bank loans, which it believes will allow banks to lend twice that amount.

Banks will have to agree with the government which loans are granted. The first tranche is expected to be approved in the next six to eight weeks.

Banks will also be expected to make new loans to other firms and individuals.

Businesses will be able to convert overdrafts to loans, effectively cutting the cost of borrowing and putting their repay-ments on a stable basis.

Lord Mandelson said that 225 million of government reserves had been set aside as a "prudent" measure in the event of a percentage of these loans going bad. "You can't imagine there will be no defaults at all," he said.

He said he was "absolutely confident" that the initiatives would produce positive results , but indicated further measures were in the pipeline.

Appearing later before the Commons business and enterprise committee, he said: "The government continues to keep under review the measures it's already taken. "

But he underlined the dire predicament in which many banks found themselves, when he said: "It's going to take quite a bit of time before the banks are restored to health."