How does "recapitalising" help?

sh856531

Hi Guys,

I'm very interested in all the measures that the (UK) government is taking to help prevent the banks from crashing (and hence me losing my savings!).

The buzzword of the day is that the government is going to "recapitalise" the banks - which as I understand it means that the government is going to buy shares in each of them to shore up their share prices.

The thing I'm struggling with is how this actually helps the banks. As I understand it, the problem just now is that the banks won't lend to one another because they haven't a clue which ones are going to go bust. How does the government recapitalising them help address this fundamental issue?

Surely just because your share price has been lifted (artificially?) by the government, doesn't actually do anything for your credibility. I can understand how gauranteeing bank transactions and injecting liquidity helps, but I don't get the share buying thing.

If anyone could help me understand why buying the bank's shares helps them lend to one another I'd be very greatfull!

Of course it's entirely possible that I've missed the whole point of the exercise, in which case any thoughts or comments would be very welcome

Huge thanks to anyone who can advise

Best Regards

Simon

lokiman

sh856531 wrote: »

The buzzword of the day is that the government is going to "recapitalise" the banks - which as I understand it means that the government is going to buy shares in each of them to shore up their share prices.

Simon

No, it's not about shoring up the share prices, it's about preventing the banks from going belly up due to insufficient access to funds so they can do business and meet their financial obligations as they fall due. The share prices are a reflection of the market's fear that the banks will go belly up. The Government doesn't give two hoots about the share prices, only the banks' ability to stay in business. Once confidence in the banks returns, the share prices will reflect that.

iamesbo

Basically the banks had no money left because they had lent it all on overpriced houses
which had dropped in value. Thus they had no money and nobody would lend then any more money because they knew it would be again lent on overpriced houses.

So the only way to 'get the banks lending again' (recapitalise them) was to find somebody daft enough to lend them more money.

That person, my friend, is you!!

Congratualtions!! You just took out a worthless £20,000 mortgage!! :rotfl::T

sh856531

Hi Guys,

Thanks for that. Ok, a one last question:-

If the government buys 50 billion pounds worth of shares, could the share price drop further and hence the government lose massive amounts of money? Or is the 50 billion sort of ringfenced or something? After the government hands over the cash does the price of the banks shares matter, other than as a measure of confidence?

Thanks again for your help

Simon