Insider Media Limited

When it introduced the dryly named Banking (Special Provisions) Act 2008, enabling the government to acquire the securities of the Northern Rock in February, the Prime Minister must have known it would probably come in handy again. But just how important probably no one, not even he or the Chancellor, could have realised.

In September Lloyds TSB, the most prudent of high street banks, announced plans to buy HBOS, whose position had been getting more precarious.

But uncertainty in the global market undermined the confidence that even this deal would go through seamlessly.

And at the end of the month the government moved to nationalise Bradford & Bingley, the ink barely dried on the Banking Act.

Even the most optimistic of speculators, or those who had their heads embedded in the sandpit, knew that all was not well. But we did not have to wait long for the situation to become crystal clear.

On Tuesday 7 October when Iceland’s second largest bank Landsbanki, which had a vibrant Midlands asset based lending operation, went into receivership, spreading panic spread among 300,000 British customers who feared that their savings may be lost.

And as more detail came into the public domain, it emerged that councils across the country had invested heavily in the Icelandic bank, in the Midlands boroughs over £100m.

It was followed by fellow Icelandic bank Kaupthing which set up a business, property and private banking operation in Birmingham 18 months ago.

The roof was caving in with bank shares tumbling. At one point RBS collapsed by over 38 per cent as investors frantically dumped stock, fuelled by rumours that the bank was suffering from losses having written insurance policies against Lehman Brothers.

And then on Wednesday 8 October the Chancellor Alistair Darling announced that the government might part nationalise some British banks by injecting an initial £50bn into the system, with a further £450bn set aside. The deal was designed to unfreeze the money markets and get the banks lending again.In the event the three-month London Inter Bank Offertory Rate (LIBOR) rate rose fractionally. But Rome wasn’t built in a day.

During the day the FTSE began to recover, with HBOS shares climbing as the bailout made it seem more likely that the Lloyds TSB takeover would go ahead as planned. And at noon the Prime Minister announced that the Bank of England had cut its base rate by one half of a percent. Then with the dark countenance of the Presbyterian schoolmaster who’s just given the class dunce a second chance, he chastised the banks: “I am angry at irresponsible behaviour.Where there is excessive and irresponsible risk taking – that has got to be punished.”

While there was no immediate comfort to be drawn from the stock market’s continuing freefall, as Insider went to press there were signs that the government’s massive investment of public money into the banking system, taking a 60 per cent stake in Royal Bank of Scotland and a large minority stake in the soon be merged Lloyds TSB and HBOS, the latter owns Wolverhampton-based Birmingham Midshires, had led to a stock market revival.

Midlands business leaders have welcomed the government’s direct action. But they are under no illusion that the package must succeed, at all costs.

Chris Clifford, regional director of the Confederation of British Industry (CBI) West Midlands, says: “Something like this needed to be done and quickly. We’re entering a new order in terms of the banking system and the role of government. Hopefully people will see it as a well thought out response by the government.”

And Clifford defends Alistair Darling who he feels has been unfairly accused of dithering amidst the financial meltdown.

He says: “The Treasury has taken the time to present a robustly structured deal that will work, so I think on this occasion criticism is a bit unfair. But now that it’s been done we really can’t afford for it to fail – it’s crucial.”

Clifford thinks that many business owners have been bewildered by the pace at which the financial crisis has evolved.

He argues that companies were managing to do business despite increasing energy costs, a volatile exchange rate and the scarcity of credit.

But the freeze has affected companies that would otherwise be in good shape as the banks have called back loans and reneged on previously agreed deals.

He says: “Businesses are finding credit extremely difficult to get hold of, and if they can, it’s expensive. But we get into situations far worse than they should be because people panic.The recent run on the Royal Bank of Scotland was based on a rumour – it just isn’t good.

“We need to restore confidence in the banking system, regain some stability and get the banks lending to each other and quickly. Until that happens many businesses are in limbo. But people can’t hang on forever; they have wages to pay at one end and a business to invest in at the other. You don’t do that at times of uncertainty and you can’t do that when there’s a credit squeeze on. Until we get stability back we just can’t move on.”

The banking system has always been reliant on confidence even at times of comfortable liquidity. The banks never hold enough cash to repay all their liabilities. But it’s at times like these that when a business loses faith in the banks it begins to feel more uncertain of its own strength.

Jerry Blackett, head of Birmingham Chamber of Commerce, says: “The events in the economy recently have been extraordinary, and the root problem emerging in the attitude of businesses locally is one of confidence.” Blackett insists that the reality of business at the coal face is still not bad, and sales are ticking over. But indications around future investment in marketing, R&D and recruitment are all heavily negative now.

Blackett agrees that the government’s decision to recapitalise the banks and to inject some life into the LIBOR market – the landing between banks – was the right one. He says: “We have to get the banks moving again and we have to get the housing market moving again. I can’t see a quick turnaround in housing.We’ll see another year or more of price reductions until consumers feel that there is value for money again.

“But I think we’re in the right direction. The risk of inflation is outweighed by the risk of a stagnant economy so I’m in favour of the Bank of England making heavier rate cuts than it had ever imagined. But rate cuts will only help if banks not only pass them on to customers, but get back into the game themselves.”

And Blackett took his chance to question Gordon Brown on the Prime Minister’s visit to meet the business leaders of Birmingham, at the height of the turmoil.

While the Chancellor had already announced that he would guarantee the Icelandic investments of personal savers, no such comfort had been afforded to businesses, charities and the public sector.

But Blackett does believe that the Midlands is better placed than most to cope. He says: “We are not heavily skewed towards one sector. We have a good spread of financial services, construction and the one bright spot in our economy at the moment is export led manufacturing.

“There is no need to panic. Some of the investment in business in the Midlands was sufficiently well advanced not to be derailed by the freeze up. But the banks need to get moving quickly now.”

And, like everyone else, the banking sector has kept a very close eye on the international efforts to keep the global economy afloat. The banks will no doubt have been encouraged by the government’s intervention, albeit after the door of Number 11 had almost been battered down.

Ray O’Donoghue, regional director of Barclays Commercial Bank, welcomes the actions of the central banks to pump cash into the money markets.

He says: “The government’s package will restore confidence in the strength of the UK banking system, and also the announcement to protect personal deposits is aimed at providing stability. Our liquidity position has remained strong and we are open for business.”

“Economic conditions for Midlands business are challenging but this is no different to other parts of the country and our businesses are as well placed as any to deal with these challenges.”

But Patrick Pryce, regional director at Alliance and Leicester Commercial Bank, warns that there is more discomfort to come.

He says: “The government’s support plays a big part in restoring confidence; but the banking sector and the economy will take time to heal.

“The turbulence in the economy won’t be fixed overnight, but there are positive steps being taken and confidence will eventually start to come back. There are still deals being done, businesses still have an appetite to grow and some banks still have an appetite to lend, however they are being selective.”

Pryce advises that it is now time for business owners to focus on the tested canons of financial prudence if they are to survive.

He says: “Businesses in the region need to concentrate on keeping costs to a minimum, maximising returns on deposits, and utilising any treasury hedging opportunities in order to safely navigate their way through the economic storm. And the East Midlands is fortunate to have the support of regeneration to help bolster its defences. It has a reputation for reinvention following the loss of the region’s textiles industry.

“No business is immune to the effect of the change in economic climate, but simple steps can be taken to reduce costs.”