October 8th, 2008

The British Treasury and the Bank of England reached a deal this morning with the banks at 5 this morning. Statement here.

Key points:

* Eight core commercial banks undertake to increase their Tier 1 capital by £25bn.

* If necessary the government will provide this, as an equity stake, with conditions on High Street lending and executive pay; details to be negotiated individually.

* Another £25bn is available on similar terms to a wider group of eligible banks, including subsidiaries of foreign banks (Abbey, owned by Santander, is already in the core group).

* A new £250bn facility will be created to guarantee interbank loans.

* “At least” £250bn £200bn of liquidity is available to banks from the Bank of England, on extended collateral; new permanent scheme for liquidity to be proposed next week.

* No blanket deposit guarantee (the retail deposit guarantee has already been raised to £50k).

Multiply the billions by 10 to get an idea of the equivalents for the US economy (£1 = $1.75; $2 trn economy vs. $12 trn).

What looks new here is the massive intervention to unglue the wholesale interbank market – not in the Paulson bailout.

Passing thought: who gave the British government this sort of financial credibility? Louis XV, Napoleon, the Kaiser, and Adolf Hitler. To defeat them, its predecessors had to raise colossal sums – and have always paid the interest on the nail. The British national debt reached 175% of GDP after WWI, 250% after WWII, and 290% in 1815. It’s now 44%, so Britain is a long way from maxing out the gold card.

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