Banks in limbo after confusion over £400bn bailout

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The Independent Online

After initial relief that the Government had come to the banking industry's rescue, confusion increased yesterday over how its £400bn plan would work, leaving markets in limbo.

Industry sources say it could take a week or more before the details of the hastily drafted plan are ironed out. A key question is whether the Government will demand that banks act quickly to boost their core tier one capital. Initial reaction assumed that banks would issue preference stock or permanent interest bearing shares.

The Financial Services Authority is not setting industry-wide minimum capital ratios and will deal with banks individually. The FSA could insist on early boosts to core tier one ratios as part of increases to tier one capital.

The Government's statement said that to qualify for guarantees on their debt, a key measure in the plan, banks must raise tier one capital "by the amount and in the form the Government believes appropriate". That raises the prospect of some banks being instructed to issue ordinary shares to boost their financial strength. The Government has said it will consider underwriting ordinary share issuance, picking up stock not wanted by existing shareholders.

HSBC was first off the blocks yesterday and moved £750m of shareholders' equity into its UK business . It said it had fulfilled its commitment for participating in the scheme. HSBC is the strongest capitalised UK bank in terms of core tier one and was able to quickly draw on existing reserves.

The rescue plan and Wednesday's interest rate cuts did little to ease the money markets. The inter-bank cost of borrowing overnight cash fell but longer-term funding costs stayed high. The cost of borrowing sterling for three months rose to 6.28125 per cent.

Part of the Government's plan is its offer to guarantee up to £250bn of banks' debt issuance. But it is not clear if the guarantee would apply to the frozen money markets.

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