Wednesday, October 8, 2008

Global Central Banks Cut Rates by 50 Basis Points - England Announces Financial Support Plan for Banks

It has been a busy night and morning around the world. On Wednesday morning, the British announced a financial support plan to give capital and liquidity to its banks. Then at 7:00 am EDT, there was an announced global central bank rate cuts. This sparked a rally in equities around the world.

Central Banks Around the World Cut Rates

The Federal Reserve led a coordinated round of global official rate cuts on Wednesday, easing by a half percentage-point, as did the European Central Bank, Bank of England and Swiss, Canadian and Swedish central banks. In an attempt to stem unprecedented global market turmoil, the Fed cut its key federal funds lending rate by half a percentage point to 1.5 percent and also lowered its discount rate by the same amount to 1.75 percent.

The ECB also cut by a half-point to 3.75 percent as did the Bank of England, taking its rate to 4.5 percent.

China also joined the effort, cutting its key rate 27 basis points.

The Bank of Japan, with rates at just 0.5%, did not ease but the Fed said the BOJ expressed its strong support for the coordinated policy action.

"Incoming economic data suggests that the pace of economic activity has slowed markedly in recent months," the Fed said in a statement. "Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit."

The Fed said that while inflation has been high, recent declines in energy and other commodity prices had tempered inflation risks.

It said the vote to cut U.S. rates was unanimous and that inflation expectations appeared to be diminishing which could help support price stability. "The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability (inflation)," the Fed said.

England's Financial Support Plan

The British government said on Wednesday it was "bringing forward specific and comprehensive measures to ensure the stability of the financial system and to protect ordinary savers, depositors, businesses and borrowers."

At least 200 billion pounds ($350 billion) will be made available to banks under a special liquidity scheme, and banks will increase their total Tier 1 capital by 25 billion pounds.

Also, the government will provide an incremental minimum of 25 billion pounds of further support for all eligible institutions, in the form of preferred shares, PIBS or as assistance to an ordinary equity fund-raising.

The move was overwhelmingly supported in the UK and around the world. The Royal Bank of Scotland (RBS), HBOS, Barclays, and Lloyds were all eligible for the plan.

The comments were outstanding from analysts, and one analyst, Jeroen Van Den Broek with ING, seemed to sum it up best. "It seems to be a well thought-out plan. I like the Tier 1 component and it seems to be a relatively secure plan. At least there is some action and it could be something that other countries could use as well. Shares and credit default swaps on UK banks have rallied, but they're not doing that in the rest of Europe. The facility to provide capital will be in the form of preference shares. Tier 1 is subordinate to senior, it's the closest you can get to equity. The Tier 1 market is essentially closed but if the UK government is offering Tier 1 capital to its banks, it really does improve balance sheets. That is very positive. For shares, it's also better than if the government took a direct equity stake."

RBS issued the following statement: "We welcome this comprehensive package of measures in response to unprecedented conditions in the financial systems. The government has increased support in a number of important areas. The proposals will enable us to strengthen our position and to support our customers across the economy."

HBOS issued the following statement: "HBOS welcomes today's announcement by the government about banking capital and a significantly enhanced wholesale money funding initiative. The government's announcement represents a very real and serious intention on the part of the authorities, following consultation with the banking industry, to bring stability and certainty to the UK banking system. HBOS believes that this initiative is very much in the interests of its shareholders and customers."

On a lighter note, one trader gave the following quote: "The first thing I did was email my colleagues at Barclays and RBS to congratulate them on being civil servants now."

Sources: Reuters, Yahoo, MSN, CNBC

No comments: