UK Waits in Trepidation for the Coming of the "toxic Bank"
A plan that has been hovering in the breeze for the last few days to establish a bank to handle the billions of pounds of worth “toxic debts” is expected to be announced today. Continuing the trend of “state-owned” banks and interventions to try and breathe some life into a very ailing economy, the “toxic bank” will function to “fence off “an area where all that remains of the UK banks don’t want to go. The billions of pounds of very bad debts that no one can handle yet won’t go away. In an attempt to prevent write offs and further devalue the banks’ value, Gordon Brown and Alistair Darling see the freezing of these debts as the lesser of several evils, in their undying efforts to squeeze some optimism into the life of the UK economy. Under the terms of the toxic bank scheme, a new state-controlled insurance company is to be established to provide cover in the event of bank customers defaulting on loans as well as allowing banks to have their bad loans underwritten. The terms are yet to be announced, but it is understood that the banks will be required to pay a fee to have their bad loans underwritten by the taxpayer, and only up to a certain level.
All of these measures are being made to encourage the partly state owned banks as well as the wholly state owned Northern Rock building society to begin to ease up on their self imposed lending restrictions.
The government’s hope is that by creating a “toxic bank” they would witness a lowering of the risk ratio on current loans. This would allow the banks to begin lending again without fear that their bad debt ratio would become out their boundaries. The formation of an insurance trust would prevent the loans being written off, in the hope that they would come good in time. Estimates are that there are 260 billion pounds of toxic assets spread across British industry, which the banks would have difficulty in reclaiming. This in fact means that the UK banking system is technically insolvent if only temporarily. The 22 billion pounds that the taxpayer-funded injection could provide some temporary respite to the lending crisis.
Over the weekend, there was little else to be cheerful about . Ernst and Young predicted that by the end of 2010, there will be more than three and one quarter million unemployed, and this figure could begin to approach three and half million by the middle of 2011.
One person moving jobs is Sir Philip Hampton, who is to become the next chairman of Royal Bank of Scotland. Sir Phillip, currently Sainsbury’s chairman has earned a strong reputation in UK banking circles due to his central role in the government’s “nationalisation” of the banks
The appointment was announced, as the bank’s shares had sunk to an all time low, with fresh fears of a further government intervention, diluting their share value even further.
Hampton will begin his introduction to the daunting task in front of him as early as today when he takes the post of deputy chairman of the RBOS, and will officially replace the incumbent chairman Sir Tom McKillop in April 2009, at the Bank’s annual general meeting. Sir Phillip will also remain in his post as chairman of Sainsbury, while stepping down as chairman of UK Financial Investments Ltd (UKFI), UKFI were established to manage the government’s 58 per cent stake in RBS as well as the other banks subscribing to its recapitalisation fund.
Also moving chairs is former UK Chancellor Kenneth Clarke who is expected will return to the Conservative front bench as part of a major reshuffle due to be announced later today, Clarke is expected to be handed the role of
The role of shadow business secretary by Tory leader David Cameron.
This means a return to facing off to his Labour party counterpart, Lord Mandelson, with the current shadow business secretary Alan Duncan expected to be offered another post.
Across the water, realities also continued to bite, and often quite hard. The long awaited announcement that the Irish government was nationalising Allied Irish Banks finally arrived. In the US, Bank of America announced that it was to receive a further a $20bn injection of emergency funding from the US government.
This was brought on by the news announced late Friday that , against predictions very much to the contrary, Merrill Lynch, had made losses of more than fifteen billion US dollars in the last quarter of 2009.
Lagging not too far behind were the ailing Citigroup who announced losses of more than eight billion US dollars for the final quarter of last year. The bank announced that they will be splitting themselves into two separate divisions. One , and revealed plans to split itself into two .separate and autonomous divisions
This article was written by eCommerce Associates for Bank — Accounts and our Finance Blog
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