Nationalisation of UK Banks?

The government has announced a bold move to buy upto £50bn worth of shares in major UK banks. The cost will be borne by the UK taxpayer and averages at around £2,000 per UK taxpayer.

£50bn is a huge sum for the treasury when you consider the annual NHS budget for 07/08 was £89bn. The total for local government spending and Defence was £55bn (Government spending)

At the moment, it is not clear what % of the top 10 banks the government will gain. Also, the government is taking a high % of preference shares (a preference share doesn’t have voting rights, but has priority in any bankruptcy and has a right to dividends even when ordinary share holders don’t)

In theory, the taxpayer has the potential to make a profit. If bank shares rise in the next 5 years, the shares could be sold for a profit. However, this is not a foregone conclusiong and the fact the government has spent so much merely reflects how worried they are with the state of the banking sector.

Furthermore, the Government has agreed to act as a guarantor for up to £250bn to underwrite interbank lending. It is certainly a remarkable decision by the government

Why Part Nationalise the Banks?

  • The Banks need the liquidity. At least this way the taxpayer gets something in return.
  • A banking collapse could cause a severe economic depression as investment and spending would fall.
  • Other schemes have not stemmed the losses banks are facing.
  • Sounds more attractive than buying worthless mortgage debts like in the US Paulson plane

More on Bank bailout and whether it is a good idea.

By on October 8th, 2008

3 thoughts on “Nationalisation of UK Banks?

  1. What level of return is needed to compensate for the cost of lending ‘borrowed money’ in the first place? We must know the interest that we are paying on this borrowed money? Also if we actually had this money, aren’t we also ‘losing’ the return we could have had by investing it elsewhere?

  2. Certainly the government is only investing in banking shares out of desperation. In normal times investing in banking shares would be the last thing it would want to start doing. But, the main motivation is not the level of return, so much as trying to secure the future of the banking sector and hence economy.

  3. tejvan – While I appreciate that; there ‘may’ come a point at which the shares could be sold back at a ‘notional’ profit. My cynicism says that this ‘profit’ will not represent the return that a ‘lender’ should expect in such a transaction?

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