Banking, Business and Public Finance Client Service Group To: Our Clients and Friends: November 24, 2008 OVERVIEW OF THE UK GOVERNMENT’S MEASURES ON STABILISATION OF THE UK FINANCIAL MARKETS Special Liquidity Scheme The Bank of England extended availability of its special liquidity scheme until 30 January 2009 which is designed to help the financial market restore confidence and liquidity. It allows financial institutions to temporarily off-load illiquid assets from their balance sheets in exchange for UK treasury bills.

Interest Rate The Bank of England continues to cut its borrowing rate. It is currently 3% as of 6 November 2008.

Landbanki Freezing Order On 7 October 2008 the failing Landsbanki bank was nationalised by the Icelandic Government. The following day HM Treasury made a freezing order to preserve assets owned, held or controlled by Landsbanki bank in the UK. This controversial order was made under the anti-terror laws and caused major diplomatic ‘row’ between the UK and Icelandic Governments.

Financial Services Compensation Scheme The UK Government raised the guaranteed compensation threshold from £35,000 to £50,000 for each deposit account held with an authorised bank.

Further Measures: -Recapitalisation Scheme – the UK Government offered to make available up to £50 billion of Tier 1 capital to eligible institutions. These funds will be available to financial institutions through the Government’s subscription to (or underwriting of) new ordinary and/or preference shares. Banks will get an injection of cash but in return the Government will impose conditions and charge fees.

-Credit Guarantee Scheme – in order to encourage new lending by banks the UK Government will underwrite any short to medium term lending transactions. This measure is only available to those financial institutions which participate in the Government Recapitalisation Scheme.

-Discount window facility – this will replace the Special Liquidity Scheme (above).

-Operational Standing Lending Facility and Deposit Facility – is designed to assist the banks to overcome shortfalls in the overnight money markets and is not a new measure. It replaces the existing system and is to be used by banks on a confidential basis.

The Banking Bill The UK Government has introduced a new legislation regime for dealing with failing financial institutions. It provides for, among others, formal regulation of the inter-bank payment system and is expected to become law in February 2009.

Pre-Budget Report On 24 November 2008 the Government presented to Parliament its pre-budget report outlining its policies in, amongst others, the banking sector.

(For more information please refer to the following pages)

Bryan Cave LLP Americas | Asia | Europe | Middle East www.bryancave.com OVERVIEW IN DETAIL

The recent events in the financial markets associated with the so-called credit crunch prompted the UK Government to take actions to prevent the situation from deteriorating to the point of collapse of the banking system. There was substantial coverage in the media dedicated to this topic. The note below is intended to provide a concise summary of the measures taken or contemplated by the UK Government in October 2008, but it is not designed to be a complete reference guide. The position is stated as at 24 November 2008.

Special Liquidity Scheme In April 2008 the Bank of England (the “BoE”) released details of a £50 billion scheme under which banks and building societies were allowed to swap certain illiquid assets (asset-backed securities) for UK treasury bills that they could use to raise funds in the inter-bank market. On 8 October 2008 the BoE announced that the original amount of £50 billion available under the Special Liquidity Scheme would be extended to at least £200 billion. The aim of this action was to improve liquidity and confidence in the market and to enable banks to conduct their daily business with their customers.

So how does this scheme work? A bank may temporarily swap certain eligible illiquid assets in exchange for treasury bills which it will use to strengthen its balance sheet thus encouraging other banks to lend to it. Only certain illiquid assets that existed at the end of 2007 will be eligible. These are highly rated assets selected by the BoE. The value of the underlying securities will be valued independently but the Bank reserves the right to use its own calculations. In order to offset any risk of potential losses under the scheme due to fluctuation in the price of eligible assets the treasury bills will be exchanged at a “haircut”, i.e. a discount to the value of the eligible assets. The treasury bills have renewable maturities for up to 3 years. A fee is payable by banks utilising the scheme based on the spread between 3-month LIBOR and 3-month Gilt repo rate, subject to a floor of 20 basis points.

This scheme was set to expire on 21 October 2008 but was extended to 30 January 2009 when it will be fully replaced by the Discount Window Facility (see below for details).

Interest rate The BoE has continuously cut its interest rate which is 3% as of 6 November 2008. This was a dramatic cut. It was the biggest one-day drop in the BoE rate since March 1981. Many predict that the BoE cost of borrowing will go down even further in the near term.

Landsbanki Freezing order On 7 October the Icelandic Government made a decision to nationalise Lansbanki Islands hf. The UK Government was unable to get clarification from the Icelandic Government as to the position of the Icelandic bank’s UK creditors. This was a widely publicised topic as a number of local authorities, police forces and individual savers used this bank for their deposits. The UK Government detected a threat to the UK economy due to the fact that the interests of UK creditors might be prejudiced as a result of the bank’s nationalisation and on 8 October 2008 HM Treasury made a freezing order in respect of the assets owned by Lansbanki Islands hf in the UK, including those funds related to Landsbanki and owned, or held, or controlled by any of Icelandic Financial Services Authority, Central Bank of Iceland and the Government of Iceland. The order was made under the Anti- Terrorism, Crime and Security Act 2001 and intended to preserve the assets of the Icelandic bank

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Bryan Cave LLP Americas | Asia | Europe | Middle East www.bryancave.com for protection of the UK creditors. It was reported that the Icelandic Government instructed Lovells to advise on potential damages claims against the UK Government in relation to this order.

On 7 October Lansbanki’s UK operations were put into receivership. Another Icelandic institution, Kaupthing Singer & Friedlander Ltd (a UK branch of Kaupthing), was placed in administration by the UK Government on 8 October. The Governments of the United Kingdom and Iceland are currently trying to resolve their differences over these two financial institutions.

Financial Services Compensation Scheme The Financial Services Compensation Scheme is designed to guarantee consumer savings up to a certain limit. From 7 October 2008 the guaranteed compensation payment to consumers holding deposits in failing banks has been increased from £35,000 to £50,000. The Government will compensate a consumer in full for the first £50,000 held in a consumer deposit account with each authorised institution. The limit applies per bank (or per banks who are operating under a single authorisation from the FSA).

This scheme is only available to consumers, i.e. individuals, and does not apply to businesses.

Further measures A. On 8 October 2008 HM Treasury announced further measures to stabilise the UK financial market. These are:

1. Recapitalisation Scheme: The UK Government offered to make available up to £50 billion of Tier 1 capital (which is a bank’s core capital consisting of equity, reserves, current year profits and certain hybrid instruments) to eligible institutions such as UK banks and UK subsidiaries of overseas banks with substantial business in the UK. Eight major UK banks and building societies confirmed their participation in the Government recapitalisation scheme – they will increase their Tier 1 capital by a total of £25 billion. This sum will be processed as ordinary and/or preference share capital and will be taken up by the end of 2008. The remaining £25 billion will be available to strengthen the balance sheets of any other interested banks.

The Government will impose conditions and charge an appropriate level of fees for its underwriting commitment. These will be worked out individually with each participating institution but in summary the Government is seeking recipients to commit to:

• maintain, over the next three years, the availability of competitively-priced lending to homeowners and to small businesses at 2007 levels;

• provide support schemes to help people struggling with mortgage payments to stay in their homes;

• address remuneration of senior executives. The Government expects no cash bonuses to be paid to board members in 2008. In respect of remuneration policy going forward, incentive schemes will be reviewed and linked to long-term value creation preventing “rewards for failure”;

• give the right to the Government to agree with boards of directors the appointment of new independent non-executive directors; and

• restrict dividend policy.

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Bryan Cave LLP Americas | Asia | Europe | Middle East www.bryancave.com On 3 November 2008 the Government announced that its investments in banks under the Recapitalisation Scheme will be managed on a commercial basis by a newly formed company - UK Financial Investments Limited.

On 18 November 2008 the Chancellor of the Exchequer clarified in his statement to Parliament that “to the extent that HM Treasury is asked to subscribe for, or underwrite, an offering for ordinary equity shares, the price would be at a discount to either the market price prevailing at the time of the transaction or, if applicable, the placing price agreed on 13th October, whichever is lower”. In respect of the preference shares he commented that “the appropriate coupon will be based on prevailing market conditions, with due regard to the rate at which eligible institutions have announced the issue of such interests most recently”. This means that the deal that banks struck with the Government in October may prove to be more expensive for banks than originally expected.

2. Credit Guarantee Scheme: This measure is only available to those institutions that participate in the Government Recapitalisation Scheme (see item 1 above). Under this scheme the UK Government is offering to eligible institutions a temporary underwriting of any new eligible short and medium term debt issuance. This scheme is designed to encourage new wholesale lending between banks. The guarantees are expected to cover around £250 billion and will be issued directly by HM Treasury.

B. With effect from 20 October 2008 the BoE introduced the following measures:

1. Discount Window Facility: This facility allows banks to borrow Government bonds for up to 30 days against collateral and designed to provide liquidity insurance to commercial banks in the event of stress.

2. Operational Standing Lending Facility and Deposit Facilities: These facilities are designed to cover any shortfalls and differences in the overnight inter-bank money market as well as technical payment glitches by providing immediate loans to banks. They replace the previous Standing Lending and Deposit Facilities which were largely underused by banks in large measure because the BoE published a list of institutions using the facility. This was interpreted in the market as a sign of weakness of each facility user. The BoE no longer discloses the list of the users of the Operational Standing Lending Facility and Deposit Facilities.

The Banking Bill The Banking Bill is another measure that the UK Government is currently rushing through Parliament and is expected to become law in February 2009. The bill addresses failing banks and establishes for the first time a permanent statutory regime for dealing with failing banks, amends the related current legislation and makes new provisions for the governance of the BoE.

The bill:

• establishes a permanent special resolution regime to deal with banks that get into financial difficulties. The regime has three options - transfer to a private sector purchaser, temporary transfer to a bridge bank owned by the BoE or transfer to temporary public sector ownership;

• creates a new bank insolvency procedure where the liquidator’s prime objective is to assist the Financial Services Compensation Scheme in protecting depositors;

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Bryan Cave LLP Americas | Asia | Europe | Middle East www.bryancave.com • provides for a new bank administration procedure for use where there has been a partial transfer of business from a failing bank;

• amends the Financial Services and Markets Act 2000 to enable changes to the Financial Services Compensation Scheme to be made, which fall outside the scope of the existing legislation;

• requires the BoE to introduce formal regulation of inter-bank payment systems;

• limits the issuance of bank notes in Scotland and Northern Ireland and provides for new reserve requirements for the issuing banks;

• makes provisions relating to the governance of the BoE, including a new statutory financial stability objective and the establishment of a Financial Stability Committee;

• allows the BoE not to disclose names of the users of its emergency funding.

Pre-Budget Report On 24 November 2008 the Government announced its pre-budget report. The main points to note relating to the banking sector are as follows:

• the Government will work with the European Union on regulatory safeguards for cross- border activities and crisis prevention as well as on increasing the level of guaranteed deposits and the speed of resolution or pay-out in the event of failure;

• the Government will review the banking regimes of its crown dependencies to line up standards of financial regulation and meet international norms with regards to taxation;

• the Government will review and shorten the rights issue process to allow efficient and orderly equity capital raising by banks;

• the Government announced the creation of a new Lending Panel which will oversee lending to both businesses and individuals. The major mortgage lenders on the Panel have confirmed that they will adopt the best practice of the leading lenders for the coming year and not initiate repossession action for at least three months after the owner- occupier is in arrears.

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