Page last updated at 09:43 GMT, Monday, 13 October 2008 10:43 UK
Bank shares fall despite bail-out

HM Treasury building
Taxpayers could make a profit if the banking sector recovers

The UK government has outlined an injection of cash into some of the UK's biggest financial institutions.

There will be 37bn of new capital pumped into Royal Bank of Scotland, Lloyds TSB and HBOS.

This forms part of the bail-out that the government announced last week when it said it was to offer a further 250bn in loan guarantees, and increased another lending scheme to 200bn.

As a taxpayer - what does all this injection of money buy me?

In return for its investment, the government expects to get a stake in the banks.

It could end up with about 60% of RBS and 40% of the merged Lloyds TSB and HBOS. However, Barclays - which had also been expected to take government cash - has said it will raise money from other sources.

While the investment is not risk free, a recovery in the banking sector could lead to a healthy profit for the government and in turn the taxpayer.

Some of the investment is in preference shares - such as 5bn in RBS - which will put the government at the front of the queue when any dividend is paid.

One can see the investment as a part-nationalisation - the government says it is an arms-length relationship. This is not a repeat of Northern Rock, Chancellor Alistair Darling has said, but the government will temporarily have representatives on the boards with a say in how they are run.

But it has stipulated certain conditions - RBS and Lloyds TSB/HBOS have promised that they'll maintain mortgage lending and small-business lending at 2007 levels.

The government has insisted that senior directors should get no cash bonuses this year, with future bonuses to be paid in the form of shares.

Where does the money come from?

To get the money for the rescue package, the government will have to borrow it - just like the US government does for its $700bn bailout plan.

There are worries that - in the long run - the government may have to raise taxes to finance all the extra debt. Whether it will have to do that depends on how long the crisis lasts.

The banks themselves can't borrow money, because investors worry whether they will be able to pay it back. That's why the government has to step in.

Will the package solve the crisis?

That's the multi-billion pound question. Nobody knows for sure. It should be enough money to keep our banks functioning.

And it should stabilise the economy - although it is unlikely that the UK will avoid a recession.

So who are the winners?

Some will see this as a fat cat bail-out, throwing money at the people who got us into this mess.

However, this has gone beyond the failure of one bank or another.

The economic situation is so dire, and the financial markets are so vital to our lives, that a collapse of the banking system would hurt us all - as borrowers, savers, consumers, employers, employees, pensioners and investors.

The banks are likely to survive. Some bankers who may not deserve their job may keep it.

The rescue deal has already led to the exit of some banking chiefs - RBS chief executive Sir Fred Goodwin has quit.

The terms of the bail-out will also lead to restrictions on bonuses.

However, punishing bankers by letting their banks fail would ultimately backfire.

I have shares in a bank - has my investment been wiped out?

Most bank shares have plunged in value recently, but it is difficult to predict what will happen to the market in coming weeks and months.

The government believes the share prices of these banks will rise and this will now benefit the taxpayer as well as existing shareholders.

That said, Barclays, which has turned down government investment, says it is abandoning its dividend for the second half of this year, which will save it 2bn.

The bank has also said it will raise 6.5bn by issuing preference and ordinary shares, which could also have an effect on existing shareholders.

Any profits paid out to shareholders will, as a result, be spread more thinly as there will be more of them.

The same is true for RBS and Lloyds TSB/HBOS because the government will now take a proportion of any profits.

And it was also announced that Lloyds TSB and HBOS have renegotiated their merger, reducing the number of Lloyds TSB shares that HBOS shareholders will receive.

The situation for shareholders in all these banks is different to Bradford and Bingley and Northern Rock. These shareholders lost their holdings when the banks were nationalised.

Are my savings more secure now in RBS, Lloyds TSB and HBOS?

The latest move means that the banks as a whole are more secure.

There is a 100% guarantee on savings in nationalised Northern Rock, but even though the government could become the majority shareholder at RBS, this will not guarantee all savings.

But remember, all savings with UK institutions are guaranteed up to 50,000 and nobody has lost any money so far, even when banks have and the government has stepped in.

What about the 250bn in loan guarantees announced in the original plan?

Banks will have to decide whether they need the guarantees. If they do, they will have to pay a fee.

The key thing is that right now - with money markets seized up and distrust ruling supreme - banks find it difficult to borrow any money.

As a result the government offer has been welcomed by all major banks.

Again, in theory, unless the banking system collapses the taxpayer could make a profit.

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