Taxpayers' £37billion 'might not be enough' to stabilise banking system

The public money being injected into Britain's three weakest banks may not be enough to stabilise the banking system

The £37billion of public money being injected into Britain's three weakest banks may not be enough to stabilise the banking system, according to the Treasury Select Committee chairman. 

John McFall called on the rescued banks to provide much more detail of their exposure to derivatives and other complex assets, many of which have been plunging in value. He said: “It's a minefield we are tiptoeing through. That £37billion might not be enough.” 

Yesterday the committee announced an inquiry into the banking crisis and invited Alistair Darling, Mervyn King, the Governor of the Bank of England, and Lord Turner of Ecchinswell, chairman of the Financial Services Authority, to give evidence. 

“Taxpayers are very concerned about the scale of this investment,” Mr McFall said, and he invited members of the public to send in questions to be put to the witnesses. 

While welcoming the rescue package, Mr McFall pointed to the huge exposure of the banks to credit default swaps, describing it as a big concern. He said: “We are seeing a process of de-leveraging. We don't know what problems that might throw up.” 

Royal Bank of Scotland, which is receiving up to £20 billion of government funds in return for a stake of up to 60per cent, has outstanding derivative trades of about £480 billion on each side of its balance sheet. 

These include positions taken in the equity and commodity derivatives markets and in credit default swaps - in effect insurance policies promising to protect bondholders against default. 

In addition to the investment risk, these derivatives pose counter-party risk, the danger that the bank or investor on the other side of the trade may not be in a position to pay. 

RBS has played down the risk posed by derivatives, arguing that many of the positions cancel each other out and that it hedges positions and requires collateral to minimise the danger. 

RBS shares slipped 1per cent to 65p yesterday, just below the 65.5p at which the bank is planning to raise £15billion in ordinary equity. 

That suggests the Government as underwriter will be left with much or all of the stock. RBS is also raising £5 billion through a preference share issue. 

Lloyds TSB and HBOS, its takeover target, both sank sharply, down 7 per cent and 5 per cent respectively to 151.3p and 85.3p - both well below their planned issue prices of 173.3p and 113.6p. 

If these levels persist, the Government looks certain to be landed with all the new shares, giving it 40per cent of the combined group. 

Lloyds was understood to be lobbying to be allowed to pay dividends to ordinary shareholders before it has fully redeemed the preference shares sold to the Government. 

Lloyds and HBOS originally agreed at the weekend to the dividend ban but the Lloyds share price has been badly hit as investors who have come to rely on the Lloyds dividend started to bale out. 

Under the current terms of the bail-out and takeover, HBOS will have to repay £3billion and Lloyds £1billion of preference shares before ordinary shareholders, who include more than two million small investors, will receive any dividend. 

Some traders are still betting the takeover will fall apart or will have to be renegotiated a third time. The HBOS share price is trading at a 7per cent discount to the revised Lloyds offer. 

Together the two banks are raising £17 billion. Shareholders from both can vote down the deal. 

Barclays, which is hoping that it can raise £6.5 billion of capital without tapping the Treasury, leapt 30.75p to 246p as it was seen as being less diluted and able to resume dividends sooner than its peers. 

Barclays is also expected to go from half-yearly to quarterly dividends. The bank has agreement in principal from one of its existing shareholders, thought to be the Qatar Investment Authority, to invest £1billion in ordinary and preference shares. 

Barclays is being sued in New York over allegations that it shifted loss-making investments on its own books into accounts held by outside investors. 

A French client accuses the bank of putting toxic mortgage-backed assets into two investment vehicles, Golden Key and Mainsale, which were promoted to outside investors. Barclays said the action had no merit and denied any wrongdoing. 

Share traders started to turn their attention to non-financial stocks after the US confirmed its plan to invest $250billion (£143billion) to boost bank balance sheets. Wall Street dived last night, the Dow Jones industrial average falling by 76.62 points to 9.310.99. continues here

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