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Document Type

Case Study

Case Series

Broad-based Capital Injections

JEL Codes

G01, G28

Abstract

Following the collapse of Lehman Brothers and the ensuing global credit crunch in late 2008, Her Majesty’s Treasury (HMT) announced a large economic package to provide support to the UK banking sector. As part of the package, the eight largest banks committed themselves to raising their total Tier 1 capital by £25 billion through either private fundraising or government assistance. Thus, the economic package featured a new Bank Recapitalisation Scheme to invest up to £50 billion in capital into UK banking and credit institutions that could not raise their assets in the private sector. Government capital was invested into either ordinary or preference shares of the participating institution. As additional requirements of participating in the scheme, institutions had to commit themselves to three years of competitive lending toward homeowners and small businesses, allow HMT to appoint new nonexecutive directors, and withhold all 2008 executive and board member bonuses. In 2009 alone, HMT invested approximately £37 billion into Lloyds Banking Group (LBG) and the Royal Bank of Scotland (RBS), where all invested interest was held by the government subsidiaries of UK Financial Investments, and later UK Government Investments. While the government remains a majority shareholder in RBS, it has sold off all invested interests in LBG.

Date Revised

2021-12-15

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