Page last updated at 07:26 GMT, Thursday, 18 September 2008 08:26 UK
Bank shares fall despite bail-out

Paul Lewis of Radio 4's Moneybox answers your questions

Lloyds TSB, one of the UK's biggest High Street banks, is to merge with HBOS after effectively staging a rescue takeover.

Together the banks hold close to one-third of the UK's savings and mortgage market and a large slice of the personal banking and business banking markets.

The BBC explains the implications of the deal going through.

Q. I've got a mortgage with one of the banks how will it affect me?

Hardly at all. You will still be obliged to pay off your home loan at the agreed rate.

In due course you may find that you are receiving letters from a different administration department, with a different name on the letter head.

On its own, a merger should not affect the interest rate that you are charged currently as that is dictated by the Bank of England and the rates banks charge each other in the wholesale financial markets.

Q. And what about our savings account?

You have nothing to worry about.

Both banks are solvent, and the government's desire to make sure no one even thinks that HBOS might be in some sort of difficulty is, effectively, a state guarantee of safety for your savings.

Plus, the Financial Services Compensation Scheme guarantees the first 35,000 of your cash anyway, in the event of an actual insolvency.

You can sleep easy.

Q. But I have an account with both banks. What then?

Under the terms of the Financial Services Compensation Scheme (FSCS), the compensation for savers in bust banks goes up to 35,000 per "authorised institution", not per account.

If a newly merged bank became just one authorised institution with the Financial Services Authority (FSA) then you would have cover for only the first 35,000 of your money, not more.

But banks sometimes retain their separate authorisations with the FSA after a merger, as in the case of the RBS and the NatWest.

Q. What happens to staff at these banks, will there be job cuts?

Yes. When two huge businesses such as these merge, there are always likely to be job cuts where the companies' operations overlap.

Lloyds has confirmed the deal will trigger job losses but played down claims that up to 40,000 staff face the axe.

Q. What about shareholders in the two banks?

Under the terms of the takeover deal, Lloyds will offer 0.83 of its shares for each HBOS share.

Based on Lloyds' closing price of 279.75p on Wednesday, this values HBOS shares at 232p each. While this is a 58% premium over HBOS's closing share price of 147.1p on Wednesday, it is still far lower than the near 10 a share seen in October last year.

If you have shares in Lloyds TSB you may be wondering if this is really such a good deal.

If there is an underlying problem with the finances of HBOS it will not disappear just because a bigger beast has swallowed it up.

It just means there is more money available to pay the cost. And that is now going to be financed partly by your bank.

Assuming that times in the banking business eventually return to some sort of normality, the new larger bank should, to some extent, return to its previous life - one in which it made profits on a gigantic scale.

That is simply because it will be the biggest bank in one of the world's largest economies.

But for the time being your bank has become an even bigger bet on the health of the UK property market.

How lucky do you feel?

Q. Where does the deal leave the other UK banks?

On the face of it, at a considerable competitive disadvantage.

But if this move manages to squash any fears in the industry that insolvency lies around the corner for any bank, then they may well benefit from this general reassurance.

Not all banks are the same though.

HBOS was undoubtedly "too big to fail". The same cannot be said of other smaller operators, especially those still heavily reliant for business on lending mortgages.

House prices are falling and mortgage lending is shrinking. Their finances are going to come under increasing strain, not less.

Q. Why this sudden merger, I thought both banks were sound?

It looks like a rescue.

Industry experts have calculated that HBOS had to buy back 150bn of short term bonds - glorified IOUs - by June next year.

They would then need to re-sell them to raise fresh cash.

Where would HBOS get the cash? Who might buy its bits of paper again? All this uncertainty seems to have contributed to the HBOS share price collapsing.

And if a crisis of confidence grips the financial markets, it is all but impossible to shake off.

As the administrators to the now defunct US investment bank Lehman Brothers pointed out, if you are a bank and no one will trade with you, you are dead.

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