Harsh, but fair

15 October 2008 By George Hay Follow @gfhay

The strings attached to the £37bn scheme such as no dividends to shareholders and high coupons for the preferred shares the state is buying are more onerous than a similar US plan. But the defect is in the US scheme which is too lenient, not in the British version.

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The UK's largest banks are lobbying the government to rethink the terms of its £37bn recapitalization scheme, according to a report in the Financial Times.

The banks believe investors are selling Royal Bank of Scotland, HBOS and Lloyds shares because they are worried about a clause in the scheme that bans dividend payouts until the banks' preference shares are paid off. That could make it less likely that investors will claw back new shares from the government, they believe.

Banks are also unhappy at the 12% coupon on the preference shares, and the fact that £9bn rather than £6bn of this type of capital will be bought by the government, breakingviews has learnt.

A similar recap scheme announced by Hank Paulson, the US Treasury Secretary, will allow US banks to pay dividends. They will also pay only a 5% coupon on their preference shares, instead of 12%, and pay 75 basis points to get their loans guaranteed by the government. UK banks have to pay an average of their credit default swap spreads over the last year plus 50bps.

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