Can Someone Explain the Bank Bail-Out?
Guido has flu and so does baby Ms Fawkes, who made her unhappiness abundantly clear between 2 a.m. and 4 a.m. this morning. So perhaps it is the grogginess that is hindering Guido’s ability to comprehend Gordon’s financial genius. The £600 billion bank bail out plan to restore liquidity to the credit markets includes the following elements:
- H.M. Treasury has guaranteed British inter-bank lending (charging a hefty penalty risk premium adding to the cost of inter-bank lending).
- The Treasury has demanded preference shares from the banks with, from memory, a 12% interest charge to be paid by the banks.
- The Treasury has also encouraged the FSA to double the requirement for banks to hold government gilts in their reserves, yielding somewhat less than a paltry 4%.
- The Treasury is demanding that banks lend at mortgage rates closer to base rates.
Is Guido missing something? How can the banks make a profit and recapitalise if the government has both hiked their cost of capital and reduced the returns on their reserves, as well as exhorting them to reduce their margins on mortgage lending? How does this plan add up?