The United Kingdom Bailout

Many people are wandering why the United Kingdom government decided to deposit nearly $90 billion into banks, while lending back $350 billion to the taxpayers. When it came time to make the final decision, the UK government realized they had no choice. Panic in the markets is at a steady increase, while banking shares have been at a steady downfall. British Prime Minister Gordon Brown, along with the help of Chancellor Alistair Darling, knew that something must be done immediately to bring back the confidence within the banking industry. Urgent action was agreed upon, and a bailout plan was put into action.

The UK government created a plan that consisted of funding the banks with over $90 billion, in exchange for shares, in hopes of reassuring the markets that the credit crunch would be survived. The loans received from the banks would total over $350 billion and would be used to stabilize the economy. The banks are currently reluctant to loan to one another, which is much needed for day-to-day business. The UK government has high hopes that this bailout will get cash flowing through the system once again.

A lot of taxpayers have been asking where this bailout idea originated. A similar plan was put into action in Sweden in the early 1990's, due to a devastating banking crisis. The plan proved to be a huge success for Sweden. Taxpayers eventually received a return on their capital investment after the bank's share prices began to increase.

The UK government decided against a U.S. style bailout for several reasons. The $700 billion bailout introduced by the U.S. government has been criticized by many. Critics say the U.S. bailout is aimed only to purchase the bad debt held by banks, and capitalize over time by doing so. This plan does not offer the banks an opportunity to recapitalize in exchange for a share holding in which could also bring the taxpayer a return. This creates a perception of greater risk for the taxpayer.

The banks are extremely satisfied with the UK's bailout plan. They have been trying hard to earn enough cash to even the balance sheets after the runs on their share prices. Abbey, Barclays, HBOS, Lloyds TSB, Nationwide Building Society, RBS and Standard Chartered have all committed to participating in the government plan. In return for the bailout plan, the UK government is asking for preference shares. The government will require the banks to implement new rules that will control executive income and dividend payments. The banks will also be asked to lend more to small businesses and homebuyers.

The UK government has faith that they will see the same success that was achieved in Sweden, however, there is always a potential risk. If the plan were to fail, the money markets would remain frozen, and confidence would continue to decrease. If share prices continue sliding, the taxpayer will lose even more. If the banks use all of the government lending, and are unable to pay it back, the financial crisis could last for years. However, the UK government remains optimistic that bank share prices will rebound, eventually resulting in profit.

For more information on the United Kingdom visit http://www.ukbailout.com.