A Quick Look At The British Bank Bailout Plan

From the Telegraph.co.uk here are the primary features of the new British bank bailout.

INSURANCE SCHEME
* Banks will have to identify their riskiest assets which they can then insure with the government for a fee. They will still be liable for initial losses but could at least put in a ceiling, hence boosting confidence.

MORTGAGES
* Build on the recommendations of a government-sponsored report that called for guarantees of the mortgage-backed securities market, perhaps to include other asset-backed products.

CREDIT GUARANTEE EXTENSION
* An extension of the window for the Credit Guarantee Scheme to Dec. 31 from Apr. 9. Under this, the state guarantees debt issued by banks that were recapitalised by the government last year. The final maturity date of Apr. 9, 2014 remains in place.

GUARANTEE FOR ASSET BACKED SECURITIES
* New facility to start in April will give full or partial guarantee to eligible high quality asset backed securities, including mortgages, corporate and consumer debt.

NORTHERN ROCK
* Northern Rock, the mortgage lender nationalised last year, will no longer be actively reducing its existing mortgage book.

BANK OF ENGLAND LIQUIDITY FACILITY
* After the closure this month of the Special Liquidity Scheme, which allows financial institutions to swap their hard-to-trade assets for more liquid ones, the BoE will extend its Discount Window facility to one year from 30 days for an incremental fee of 25 basis points.

BANK OF ENGLAND ASSET PURCHASE FACILITY
* The BoE will, from Feb 2. and with Treasury authorisation, be able to buy high quality, private sector assets with an initial fund of 50 billion pounds. The BoE will be indemnified by the Treasury.

QUANTITATIVE EASING
* The BoE’s asset purchase facility also gives a framework for the Monetary Policy Committee to use asset purchases for monetary policy purposes should it see fit.

PREFERENCE SHARES
* The government will also swap its preference shares in RBS worth 5 billion pounds for ordinary shares, aiming to remove pressure on the bank to pay 12 percent annual interest. That could see Britain increase its stake in the lender to near 70 percent from 58 percent.

It looks like they blinked when it came to buying toxic assets. It doesn’t seem as if they have done anything revolutionary and this is probably as good a road map as any you are likely to find for the Obama administration approach.

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