Defaulting banks - where will it stop?

[Jan Klimkowski]

With the IMF stating that global markets could lose another 20% of their value this coming week, there are now leaks that the G7 will suspend trading in all bank shares on Monday. The British govt will then take a majority stake in RBS which is one of the UK's major High Street clearing banks, but is heavily exposed in CDS & MBS markets.

Financial crisis: Government to take majority stake in RBS
Banking shares across the G7 nations could be suspended tomorrow as Government prepares to take a £35bn equity stake in four of the UK’s high street banks.

Treasury sources confirmed that the Government had drawn up plans to take on a majority stake in Royal Bank of Scotland and big holdings in Lloyds TSB, HBOS and Barclays under its £500bn plan to bail out the banking industry.

Talks were continuing this weekend, added the source, warning that it was a fast-moving environment.

The Government is expected to invest £12bn in RBS, £10bn in HBOS, £7bn in Lloyds TSB and £3bn in Barclays, following request for the emergency funding from the banks.

Analysts believe a further 20 per cent fall in bank shares this week would leave the Government with little option but to nationalise virtually the entire sector.

With markets in the US and Japan closed on Monday, Britain and the other G7 nations are determined to avoid further slumps in banking stocks that could compound the global contagion.

The developments emerged as the International Monetary Fund warned global equities could plunge by a further 20 per cent in the coming days unless governments deliver concrete action to address the crisis.

The world financial system was standing on the “brink of systemic meltdown”, Dominique Strauss-Kahn, the IMF managing director, said. “Intensifying solvency concerns about a number of the largest US-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown.”

The warning came as Chancellor Alistair Darling told his fellow finance ministers that they “must get on with” dramatic plans to recapitalise their banking systems.

The German government is today expected to unveil plans to pump billions of euros into banking shares. The country is likely to announce a plan to spend around €50bn to €100bn on bank equity.

Speaking about the recapitalisation plans, Mr Darling said: “This is not an optional extra. It is imperative [other countries] get on with it. There is a very clear sense that governments need to act now. The reality is staring us starkly in the face. This is a necessary step towards stabilisation. The threat is blindingly obvious. You can’t stabilise economies unless you have a stable banking system.”

He spoke as the IMF pledged to support a radical international plan to halt the financial crisis. The French government is also expected to unveil a rescue plan at a summit in Paris today. The US confirmed on Friday that it will use its $700bn bail-out fund to buy shares in troubled banks and financial institutions.

“We’re going to do it as we can do it in a proper way that will be effective. Trust me, we’re not wasting time, we’re working around the clock,” said Henry Paulson, the US Treasury Secretary.

In Britain, insurers and pension funds have been approached by banks in an attempt to use surplus cash on their books to improve liquidity in the banking system.

Institutions have been approached to gauge their interest in further capital-raisings at the banks. Richard Buxton, head of UK equities at Schroders, said: “The likelihood is we will support a number of banks to varying degrees. But there is no way the markets will be able to provide the full £25bn required.”

Although the bail-out announced last Wednesday focused attention on recapitalisation through preference shares rather than straight equity, the banks are now looking increasingly in need of core equity injections.

All four major lenders have been in discussions with the Financial Services Authority over the additional writedowns they must take on their “toxic” assets.

Large provisions will erode their equity base, which cannot be replaced with preference shares. Banking sources said the Government wants to “err on the side of caution” and recapitalise the four stricken lenders with a massive cash injection.

One bank director said: “If you are going to do this, you have got to do it right. The Government can’t come back a second time.”

Bank bosses were yesterday locked in negotiations with the Government that are scheduled to continue today in an attempt to hammer out a deal before the markets open on Monday.

Banks that cannot secure institutional support will see the taxpayer step in with the money through the underwriting process.

Buxton said investors may be deterred from supporting lenders they fear will end up with large government stakes.

After their equity raisings, the banks will top up with preference shares. The coupon, or interest rate, on the shares is expected to be set at between 9 and 12 per cent, depending on the bank, and cannot be retired for five years.

The coupon will provide an attractive income for the taxpayer and encourage the banks to refinance the preference share debt as soon as the five years are up.

If the banks recover and the markets reopen beforehand, other institutions may buy the preference shares off the Government for the high coupon.

http://www.telegraph.co.uk/finance/finan...n-RBS.html