This plan is a gamble, and our stake may rise

This plan is a gamble, and our stake may rise

Is it a £50bn or a £500bn rescue package? It makes no difference. All the chips will be committed if necessary. The sums made available to the banks under the special liquidity regime will be "at least" £200bn. In terms of capital being injected into banks, the back-stop facility of £25bn is "an incremental minimum". The extent to which banks take up £250bn of funding guarantees will be kept "under review". In other words, these very large numbers could yet grow.

So thank goodness the scheme is well-designed. It addresses banks' three big problems - capital, liquidity and funding. In that regard, it is better than Hank Paulson's $700bn bail-out plan in the US, which offered only to tow away some toxic assets at undetermined prices. The UK version leaves these assets on the banks' balance sheets but should make the institutions more able to manage their pain. If the capital cushions prove inadequate, the cushions will be stuffed with yet more capital. The plan is bold, risky and carries no guarantee of success, but there is no alternative.

Advertisement starts

---

---

Advertisement ends

On Tuesday afternoon, with the share prices of Royal Bank of Scotland and HBOS falling 40%, there was the possibility of a run on the entire UK banking system.

Thank goodness, too, that the Bank of England sees the need to cut interest rates - or has been told to see the need. Few bank recapitalisations ever work without lower rates.

In the jargon, it's a question of steepening the yield curve - lowering the cost of short-term money to give banks an incentive to lend at higher rates over longer periods. The US has refloated its banking system this way more than once. The technique cheats the taxpayer, because the full benefits of lower rates are not passed on, but, at the moment, the priorities are financial stability and avoiding a deep recession. Inflation is yesterday's problem.

So what is there to quibble about? Plenty. Why, for example, is Sir Fred Goodwin, chief executive of Royal Bank of Scotland, still in a job? RBS is the author of its own misfortune to a great degree. Sir Fred pursued the top-of-the-market acquisition of ABN Amro last year even when the credit crisis had started to unfold. RBS has notably failed to take self-help measures: we're still waiting for the bank to sell the bulk of its insurance assets, as it pledged. Is the taxpayer now expected to support RBS with the same captain at the helm?

There was nothing in yesterday's statement to suggest otherwise. There was a line about how the government would "take into account dividend policies and executive compensation practices" as a condition of committing capital. That's woolly. If the taxpayer is claiming the right to influence pay practices, surely there is a right also to influence who is paid. In the US, senior heads have rolled when financial institutions have been bailed-out; in Britain, we're still waiting.

The poor taxpayer will also wonder why the most important figure was missing from yesterday's release - how much will the banks be paying for their capital? What level of dividend will be paid on preference shares? By rights, the yield should be above 10%, and maybe as much as 12% in some cases. Until we see the figures, it is hard to judge whether the taxpayer is getting a fair deal, and to what degree we will share the spoils if the plan works.

And how do you measure a commitment to support lending to small businesses and home-buyers? That is the other ambition of the scheme, but the government is relying on the bankers to play ball.

Barclays last month picked up the carcass of Lehman Brothers' operations in New York. Maybe it got a bargain that will strengthen the bank to everybody's advantage.

But will such overseas adventures be allowed when there is a crisis on the home front? If not, how could they be prevented? The government is not asking for a seat on the board of any bank.

That lack of detail illustrates how the scheme was put together in a hurry. The official version of events is that the plans have been worked on for three weeks. Maybe, but Alistair Darling was clearly rushed into an announcement by events in the market.

The market's mood hardly improved yesterday, but little should be read in that. The fires in the global financial system continue to burn and the belated arrival of Darling's fire engine doesn't tell us how much damage will eventually be done. At least there is now a broad plan, but let's have the details sharpish, please.

guardian.co.uk © Guardian Newspapers Limited 2008