UK launches 2nd Bank Rescue Plan, RBS Losses Near $30 Billion

By and Sumeet Desai | January 20, 2009

The UK launched a second bank rescue plan on Monday. One of the recipients, Royal Bank of Scotland, said it lost over £20 billion ($29.3 billion) last year and Japan said bad loans worldwide had further to climb. The UK government will allow banks to insure against steep losses and guarantee their debt to stop the credit crunch pushing the economy into a deep slump.

The plan also creates a new £50 billion ($73.3 billion) Bank of England asset-buying facility, lays the framework for boosting money supply as interest rates near zero and will raise the state’s stake in Royal Bank of Scotland to near 70 percent from 58 percent previously.

At the same time, RBS said it made a loss of over £20 billion ($29.3 billion) last year, the biggest loss in British corporate history, including a huge goodwill hit on its purchase of parts of ABN AMRO in 2007.

Bank of Japan Governor Masaaki Shirakawa said financial institutions’ bad loans worldwide were likely to increase beyond current estimates. “There is a connection between the accumulation of bad loans and banks tightening credit and causing economic conditions to worsen further. As such, personally I expect the current figure of $1.4 trillion to rise a little more,” Shirakawa told a parliamentary committee.

Britain pumped £37 billion ($54.2 billion) into the banks in October but credit remains scarce and finance minister Alistair Darling said fourth-quarter GDP figures out this Friday week would confirm the UK economy is now in recession for the first time since 1992. “There is a way to go yet. Looking out towards the next year, there’s no doubt the downturn in economies across the world is really quite sharp now,” he told BBC Television.

Under the latest British plan, lenders would have to identify their riskiest assets which they could then insure with the government for a fee. They would still be liable for initial losses but could at least put in a ceiling, boosting confidence.

Denmark came up with its own 100 billion crown ($17.79 billion) bank aid package on Sunday, offering to inject public credit into banks to jump-start their corporate and private lending to stimulate a slumping economy.

The worst financial crisis in eight decades has already felled some of the banking industry’s biggest names. Shares in Barclays, one of Britain’s biggest banks, crashed 25 percent on Friday as speculation hit fever pitch.

On Monday, Barclays said it knew of no justification for that fall and said it expected to report annual pre-tax profit well in excess of the 5.3 billion pounds consensus estimate.
Its shares leapt 17.4 percent in response, while Europe’s top share index climbed 0.9 percent in early trade.

OBAMA POISED

The incoming U.S. administration is also poised to act, saying it will make its bailout funds work harder to get credit flowing again to cash-starved consumers and companies.

In Washington, a senior adviser to Barack Obama, who will be sworn in as president on Tuesday, said the new team would soon change the way the second half of the $700 billion bank rescue scheme was run to make it more effective.

“We want to see credit flowing again. We don’t want them to sit on any money that they get from taxpayers,” Obama adviser David Axelrod said on Sunday.

One option discussed by the U.S. Federal Reserve, Treasury and Federal Deposit Insurance Corp is a government-run “aggregator bank” that would absorb toxic debt weighing down banks’ balance sheets.

Obama is also working with lawmakers to launch a $825 billion fiscal stimulus plan by mid-February.

The U.S. economy has already been declared in recession. Data this week will do little to dispel the gloom.

One forecasting group said Britain’s economy was set to shrink 2.7 percent this year, the biggest annual contraction since the end of World War Two.

Japan is expected to report on Thursday a record 30 percent drop in exports and its central bank is set to forecast that the world’s second-biggest economy will contract for the full two years to March 2010 and will soon return to deflation.

China, the world economy’s main growth engine, is expected to show its economy expanded at its slowest rate in nearly a decade in the fourth quarter.

International Monetary Fund Managing Director Dominique Strauss-Kahn said he feared other countries may need IMF bailout packages and said it was not inconceivable that Britain might one day need help.
“I’m afraid that some other countries, not only in eastern Europe, but all around the world (may need help),” he said when asked if he believed other countries, particularly in Europe, would have to seek IMF bailouts.

The global credit crisis is also claiming political casualties with top South Korean economic ministers getting the sack.

(Writing by Mike Peacock; editing by Guy Dresser)

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