Government undertakes to underwrite all domestic financial institutions

asdasd

Most of the assets on Irish banks balance sheets are performing assets.

The problem is the large loans to developers, isnt it? If these loans are non-performing why dont the banks call in the loans, and seize the assets? After all property has nominally fallen about 10% and the developers were presumably expecting a profit of more than 11% - porably in the region of 50-100% per unit? So why not buy and flog?

I think they think they cant sell new developments at all, for anything, that the price of the new developments is really close to zero.

TheBazman

asdasd wrote: »

The problem is the large loans to developers, isnt it? If these loans are non-performing why dont the banks call in the loans, and seize the assets? After all property has nominally fallen about 10% and the developers were presumably expecting a profit of more than 11% - porably in the region of 50-100% per unit? So why not buy and flog?

I think they think they cant sell new developments at all, for anything, that the price of the new developments is really close to zero.

The banking model in Ireland is not one where it seeks to repossess as soon as it sees trouble. It's much better (where realistic) to work with individuals or indeed developers and I presume extend the borrowings in some cases. After all economies move in cycles and if the banks feel that we can come out the other side of this recession and the developers begin selling again, I'm sure they would prefer this than being forced to take back the assets and selling them at firesale prices

andrewdeerpark

As I said earlier I would have nationalised the failed institution removed its CEO, chairman and board with a state appointed grouping directly accountable to the minister for finance, central bank and regulator accountable to the dail.

This would have saved the bank in question while at the same time putting the fear into the remaining banks cosy boardrooms. I am assuming the institution that caused this current furore is the commercial lending one with no retail presence.

Then passed draconian regulation giving an individual appointed by the financial regulator a seat on the board of all banks, with monthly updates to the minister of finance and a special bi-partisan dail finance committee, with them deciding whether our new bank guarantee system should be provided on a bank – by - bank basis, with the guarantee only renewed on say a 2 monthly basis with a maximum time period of 2 years for this emergency legislation.

[FONT=&quot]At the end of each 2-month period the individual bank would be reapplying for the guarantee.[/FONT]

Brendan552004

I think you are right, if the Government and the taxpayers are guaranteeing the banks depositors, I think each of the banks in question should have a watchdog director appointed by the Government to keep an eye on what is going on at board level.

I also think that the guarantee should be retrospective, only cover deposits that were in place the day the guarantee was announced. No new deposits should be covered.

I also think that the government should set up a State bank and take over the dormant assets that a lot of the banks hold, repossessed land, buildings etc. we may be able to get rid of some of the eyesores that are around.

This was done in Sweden in 1992 when the banking system nearly failed, it turned in a profit for the Government & taxpayer over a four year period.

mike65

Isn't talk of nationalising one bank foolish? Wouldn't all the money move from every other bank into that bank and so create a larger problem?

Mike

andrewdeerpark

Brendan
Fair points we can add you amendments to the list.

If we get going and put our heads together here we might actually put together a better piece of legislation than the one they are debating over in the dail currently.

This whole blank cheque guarantee with regulation to follow is a non-starter.

Andrew

zepp

Brendan552004 wrote: »

I also think that the guarantee should be retrospective, only cover deposits that were in place the day the guarantee was announced. No new deposits should be covered..

That is the very last thing that should be done. The Irish banks are low on cash i.e they don't have enough cash to cover their debts. What they badly need is cash in the shape of deposits. What the gaurntee does is make the banks the safests banks in Europe to put your cash. And according to some reports. Money is floding in from the UK. From people worried that if a English bank goes tits up no more then 50,000 will be covered. While here it will be all covered. If Ireland can take in enough money from abroad the banks will be safe and the gaurntee will have cost zero. In fact as a fee is being charged by the government it will actually make money.

Hanley

Ok we know that there's going to be some form of payment from the banks to the government for this service.... We know there's the possibility of builders and homeowners defaulting on payments and facing repos.

Why not just give any repossed property's to the government (if there's a large number, sell them at or below cost price) and use them as social housing??

TheBazman

Brendan552004 wrote: »

I also think that the guarantee should be retrospective, only cover deposits that were in place the day the guarantee was announced. No new deposits should be covered.

I also think that the government should set up a State bank and take over the dormant assets that a lot of the banks hold, repossessed land, buildings etc. we may be able to get rid of some of the eyesores that are around.

That is a terrible idea - whats the point in guaranteeing only existing deposits? Given that a fair chunk of banks funding is short term (1mth and 3mth), what happens then? Deposits mature and no new cash is received - you are back at square one

leninbenjamin

mike65 wrote: »

Isn't talk of nationalising one bank foolish? Wouldn't all the money move from every other bank into that bank and so create a larger problem?

Mike

Yup. this is precisely why the govt. here have been so proactive on this issue. the other choices are do nothing, let the first bank fail and watch the domino effect as it takes the economy with it, or let the first fail and nationalize while having to drain the public finances while bailing out the bad debts. either isn't that appealing on the national level.

of course the govt. need to put in place ample regulations and some risk calculated expenses to counter against the moral hazard, but i do think it's the best option available to us. let's just hope the EU don't **** it up prematurely for us (and let us get on with that ourselves )

TheBazman

andrewdeerpark wrote: »

As I said earlier I would have nationalised the failed institution removed its CEO, chairman and board with a state appointed grouping directly accountable to the minister for finance, central bank and regulator accountable to the dail.

This would have saved the bank in question while at the same time putting the fear into the remaining banks cosy boardrooms. I am assuming the institution that caused this current furore is the commercial lending one with no retail presence.

Then passed draconian regulation giving an individual appointed by the financial regulator a seat on the board of all banks, with monthly updates to the minister of finance and a special bi-partisan dail finance committee, with them deciding whether our new bank guarantee system should be provided on a bank – by - bank basis, with the guarantee only renewed on say a 2 monthly basis with a maximum time period of 2 years for this emergency legislation.

[FONT=&quot]At the end of each 2-month period the individual bank would be reapplying for the guarantee.[/FONT]

So are you saying that you are not in favour of the current guarantees for the 6 banks mentioned, however if one was allowed to get into trouble and was nationalised, then you would be happy to provide the guarantee the remaining 5 on a rolling 2 month basis?

Also I dont see any benefit from a 2 month guarantee. Banks have to for Regulatory reasons structure their funding all the way out the maturity curve, including some beyond 1 year maturity. At least with a 2 year guarantee it is likely that international investors will provide funds up to that, thus satisfying the banks regulatory requirements. If the guarantee is only for 2 months, how will banks source the longer term funding?

TheBazman

More generally, I wonder if those who are against the plan would change their mind if the fee was structured so that banks had to pay a percentage of their profits for the next 2 years (ie) the better the banks do as a result of the guarantee, the better the govt and thus the taxpayer does?

daveirl

This post has been deleted.

leninbenjamin

daveirl wrote: »

This post has been deleted.

No bank is indestructible though, that's something we should never forget.

But to relate our banks to the likes of the above in the first place is a bit pointless. to begin with our market is so small and our economy so open they are always going to find themselves more exposed to the business cycles than others.

Brendan552004

I think we are having a much better discussion here than they are having in the Dail. I think we are covering more issues than they are. I really do not think they have worked out the major ramifications of this whole deal. what happens if 80% of European savers decide to deposit their money in Irish banks. 100% guaranteed, they will not get that deal anywhere in Europe or anywhere else in the world.

Wait until the US investors cop on what is going on. Deposit in Irish banks get a guaranteed return of 5.5% and all insured by the Irish Government and us, the tax payers.

I think there is a real potential to walk us all into real trouble, on a major scale, this mistake could potentially bankrupt the whole country if the big players get their figures right, and they have the knack of doing that, they could ruin us all.

I think we are being walked into an ill thought scenario, I think we have to cap the situation now before the International investment community discover the opportunity we are offering them, a Government guarantee on any money they would like to deposit in our banking system. No one else in the World is offering them this, a guaranteed return of 5.5% a year over the next two years.

I think a few of the moderators on this forum should be appointed to Bank boards, then we would get reality, we would get a voice, not political puppets who would agree to anything their masters would say.

andrewdeerpark

From looking at the committee stage of the bill (23:17 1/10/08) it seems some of our proposals are being considered with a 6-month report to the dail financial committee, whether these make it to the final draft we shall see, also the capping of executive pay.

I still do not see enough public transparency and too much power in 1 mans hand. Plus progress seems painfully slow getting to the final bill.

My idea on the 2 months rolling re-application is keeping a tight leash on the banking management plus when the worldwide credit crunch eases the bank itself may choose to leave the scheme pre the 2 year period for operational reasons, cutting the length of time the tax payers money is on the line. However once you leave the scheme there is no way back in.

My only hope is that this guarantee be as short as possible.

I do note the British getting upset about the guarantee, if we destabilise their deposits them this plan will never be enacted, as like them or loath them we still depend on them for the bulk of our trade and we cannot afford to kick their economy when its down so a cap will have to be placed on the amount of deposits from other EU states allowed.

leninbenjamin

Brendan552004 wrote: »

I think we are having a much better discussion here than they are having in the Dail. I think we are covering more issues than they are. I really do not think they have worked out the major ramifications of this whole deal. what happens if 80% of European savers decide to deposit their money in Irish banks. 100% guaranteed, they will not get that deal anywhere in Europe or anywhere else in the world.

Wait until the US investors cop on what is going on. Deposit in Irish banks get a guaranteed return of 5.5% and all insured by the Irish Government and us, the tax payers.

I think there is a real potential to walk us all into real trouble, on a major scale, this mistake could potentially bankrupt the whole country if the big players get their figures right, and they have the knack of doing that, they could ruin us all.

I think we are being walked into an ill thought scenario, I think we have to cap the situation now before the International investment community discover the opportunity we are offering them, a Government guarantee on any money they would like to deposit in our banking system. No one else in the World is offering them this, a guaranteed return of 5.5% a year over the next two years.

I think a few of the moderators on this forum should be appointed to Bank boards, then we would get reality, we would get a voice, not political puppets who would agree to anything their masters would say.

banks make money off deposits. AIB, BOI and co. would be finally be able to resume selling the normal debt instruments we've take for granted like overdrafts etc. the lack of which has been killing some small and medium sized businesses in this country for the past 6-12 months.

it could also mean certain parts of the construction sector could resume normal activities again. Plenty of sites have lain idle, not because they've become unprofitable, not because the banks didn't want to lend to them, but because with the freeze in the financial markets they couldn't raise the funds to loan to them. (not that i want to see us go overboard again though, i do hope in the interim the government will close most of the tax loopholes that artificially inflate the demand for residential properties in this country).

so anyway, i really doubt that would be a major concern for the banks. if anything it's a good thing as they'll be among the few actually able to offer debt instruments in the current market.

as for the British, I think there may be an element of jealousy that they didn't think of doing something like this in the first place. they've had quite a few messes to sort out in recent times. this has been on the cards for many countries, we are the first to enact it (or well, try to, i'm guessing this has a lot more to play out).

edit: reading back on a few posts maybe i'm being overly optimistic about all this. afterall it is Fianna Fail proposing this... hmm...

DeVore

I cant see any problem if all of Europe banks in Ireland. Its worked for Switzerland for decades! But seriously the problem is a LACK of liquid credit, having more deposits would be great.

My personal bugbear is that the money should only be used to buy assets and shares, that way the taxpayer is exposed to the *risk* of these assets. So, if 10% of those mortages fail we are exposed to a 40B loss. On the other hand, if they rose when things settle then the taxpayers could actually be in profit. In this way, the 400Bn number would be something of a red herring as the assets would be extremely unlikely to all fail after they have been underwritten.

In many ways, this offer of 400Bn ironically makes it a lot less likely that they will have to part with anything like that much since banks operate on the perception of reality rather then on reality itself!

The interesting question is what will Europe do in response both at a financial level and a political level.

DeV.

TheBazman

daveirl wrote: »

This post has been deleted.

since the start of the credit crisis JPMorgan have had to take writedowns on their assets of $18.8bn, HSBC $27.4bn, Barclays $7.5bn, BNP $3.7bn. I dont think any of the Irish banks have had to take writedowns of more than €50 - 100m

TheBazman

andrewdeerpark wrote: »

From looking at the committee stage of the bill (23:17 1/10/08) it seems some of our proposals are being considered with a 6-month report to the dail financial committee, whether these make it to the final draft we shall see, also the capping of executive pay.

I still do not see enough public transparency and too much power in 1 mans hand. Plus progress seems painfully slow getting to the final bill.

My idea on the 2 months rolling re-application is keeping a tight leash on the banking management plus when the worldwide credit crunch eases the bank itself may choose to leave the scheme pre the 2 year period for operational reasons, cutting the length of time the tax payers money is on the line. However once you leave the scheme there is no way back in.

My only hope is that this guarantee be as short as possible.

I do note the British getting upset about the guarantee, if we destabilise their deposits them this plan will never be enacted, as like them or loath them we still depend on them for the bulk of our trade and we cannot afford to kick their economy when its down so a cap will have to be placed on the amount of deposits from other EU states allowed.

I'll say it again - a 2 month guarantee, rolling or not is absolutely pointless. No international investor will give a bank medium to longer term funding on the back of a 2 month guarantee

is_that_so

andrewdeerpark wrote: »

I do note the British getting upset about the guarantee, if we destabilise their deposits them this plan will never be enacted, as like them or loath them we still depend on them for the bulk of our trade and we cannot afford to kick their economy when its down so a cap will have to be placed on the amount of deposits from other EU states allowed.

We can't be responsible for British inaction on their own deposits. Look at the dithering over Northern Rock. They are having a meeting this weekend on it. The Irish action has highlighted a need not just for them, but also for the rest of the EU to address this sooner rather than later.

TheBazman

is_that_so wrote: »

We can't be responsible for British inaction on their own deposits. Look at the dithering over Northern Rock. They are having a meeting this weekend on it. The Irish action has highlighted a need not just for them, but also for the rest of the EU to address this sooner rather than later.

I agree - just some comments this morning on Reuters
STATE-OWNED NORTHERN ROCK SAYS RECENT TURBULENCE HAS LED TO "SIGNIFICANT INFLOW OF RETAIL DEPOSITS, PARTICULARLY IN RECENT DAYS"

NORTHERN ROCK SAYS WITHDRAWING SEVERAL SAVINGS PRODUCTS TO AVOID EXCEEDING 1.5 PCT OF UK RETAIL DEPOSTIS

Where would we get if we complained about Northern Rock having an advantage over our domestic banks and taking our deposits? We would have been told where to go


Also if one of the preconditions of the plan is a cap on executive pay - does this mean that Brian Linehan can put a cap on the pay of the CEO of RBS, Danske etc? I cant see the non-Irish banks with retail operations in Ireland signing up for that!

andrewdeerpark

All pretty pointless right now as from my reading of the situation Brian Lenihan has almost unanimously got his blank chequebook to do as he see’s fit with little oversight, and regulation to follow, president signing into law around lunch time

This all smacks of the good olde Charlie Haughey days and the Larry Goodman bailout with examinership law enacted to save his best pal because of the Iraq beef export scheme. In that case I think the dail was recalled and Larry got his creditor protection with the farming community whipped into a media frenzy getting the public onboard, the similarities with this occasion are striking.

A small bank of the rich and commercial property sector with no retail presence being saved in the process putting the “deeds of the country” on the line so as the inner circle business elite will not be effected and the helicopter parks at Punchestown and Galway remain full over the coming years.

We still do not have any word from the banks are they going to write down their asset values recheck their balance sheet or still peddle the old chestnut that they are “fundamentally sound”, their silence is deafening.

I understand my rant is not an economic one, more I believe the real reason why this current 400bn bailout was enacted or am I wrong?

As the saying goes the people get the leaders they deserve so we probably deserved this for our excesses over the last 10 years.

leninbenjamin

andrewdeerpark wrote: »

am I wrong?

yup. you're taking a very narrow minded approach about all this. seems you want the entire country to suffer just to teach the fat-cats a lesson. I personally would like to see all my neighbours and friends keep their jobs, but hey, that's just me.

TheBazman

andrewdeerpark wrote: »

We still do not have any word from the banks are they going to write down their asset values recheck their balance sheet or still peddle the old chestnut that they are “fundamentally sound”, their silence is deafening.
.

There are stock exchange rules as to when they can come to the market with statements. And just for info one of the large 2 had a trading statement in the middle of Sept where they increased their impairment charges, said they dont expect loan losses to improve significantly before 2011, and said they expect profits to fall. Is that not acknowledging hard times ahead as opposed to the old chestnut you mention?

andrewdeerpark

Well only time will tell, but historically rushed secret legislation and deals done late at night in elite clubs for elites of society has bitten the taxpayer; recent example the institution / religious child sex abuse state subsidy deal?

Will this be any different?

asdasd

So it seems that Irish banks must try and increase liquidity by getting depositors - big depositors - from other european countries, which is in effect to try cause a run on their banks.

Prediction: All European countries respond with similar legislation:
Result: Back where we were.

is_that_so

No we won't be. It was never a deposit problem, just a perception that some Irish banks were in danger and exposing them to the risk of a bank run. The increase in guarantee on deposits was to avoid runs on Irish banks and calm the nerves of depositors, not to invite the rest of Europe to put money in Irish banks. The other largely ignored, and IMO, far more important part of the bill, is to provide a State guarantee on loans which will help the banks borrow on interbank markets. This aids liquidity and helps mitigate the risk of a healthy bank defaulting,failing and pulling down the whole system.

is_that_so

is_that_so wrote: »

No we won't be. It was never a deposit problem, just a perception that some Irish banks were in danger and exposing them to the risk of a bank run. The increase in guarantee on deposits was to avoid runs on Irish banks and calm the nerves of depositors, not to invite the rest of Europe to put money in Irish banks. The other largely ignored, and IMO, far more important part of the bill, is to provide a State guarantee on loans which will help the banks borrow on interbank markets. This aids liquidity and helps mitigate the risk of a healthy bank defaulting,failing and pulling down the whole system.

none of our banks are healthy - some have been giving 110% mortgages in the UK FFS

http://www.guardian.co.uk/business/2008/oct/02/northernrock.banking1

Blindjustice BATONEFFECT wrote:

Just How Sound is the Irish Banking System?
Morgan Kelly
Professor of Economics, University College Dublin.
While there has been a lot of interest lately in the possible risk to banks from sub-prime
loans, nobody seems terribly concerned by the large and rapidly growing exposure of Irish
banks to property speculators. Irish banks are now owed almost as much by builders and
developers as they are by mortgage holders, and are now more exposed to commercial real
estate than Japanese banks were when they crashed in 1989.
While mortgage lending has slowed since the middle of last year, lending to builders and
developers continues to grow rapidly and now stands at almost €100 billion, an increase of
€20 billion on last October.
To put these numbers in perspective, €20 billion is twice the market value of Bank of
Ireland shares; while €100 billion is the approximate value of all public deposits with retail
banks. Effectively, the Irish banking system has taken all its shareholders' equity, with a
substantial chunk of its depositors' cash on top, and handed it over to builders and property
speculators.
In fact, if you leave out the quarter of mortgages that are for buy-to-let property, itself a
small time form of property speculation, lending to developers is now €20 billion more
than lending to people to buy their own homes.
Back in 2000, lending to construction and real estate made up only 8 per cent of Irish bank
lending, much like other European countries. Now it has risen to 28 per cent. By
comparison, just before the Japanese bubble burst in late 1989, construction and property
development had grown to a little over 25 per cent of bank lending.
Increased lending for construction and development is driven by banks’ urgent need to
meet earnings expectations, and is unavoidably risky. While most home owners will
continue to pay mortgages even with negative equity, international experience shows that
developers will walk when markets turn down, leaving banks, and often governments, to
pick up the pieces. Diversification for lenders is difficult, moreover: when one developer
goes bust they typically all go bust.
While lending to builders, at €25 billion, is a good deal smaller than the €75 billion lent to
real estate speculators, many of the loans appear to be in difficulty already.
During the property boom of the last decade, a mutually profitable symbiosis emerged
between banks and builders. Banks would provide lines of credit at a generous markup
over wholesale interest rates for builders to buy and develop sites, and builders would pay
off the loans once they sold the new property, which they were often able to do before a
single brick had been laid.
The arrangement between banks and builders was fine so long as sales of new houses did
not slow, leaving builders unable to repay loans. Since the start of this year sales of new
houses have not slowed, they have entirely collapsed.
A Dublin estate agent told me that whereas last year they sold over 3,000 new units, this
year they have sold fewer than 100. They are about to try to launch one of their new
developments for the third time, the first two launches having netted exactly no buyers.
While the market for secondhand houses still limps along, people have stopped buying new
houses because they are afraid that developers will subsequently slash prices and leave
them with negative equity. They are right to be afraid. My contact told me of one heavily
marketed development where they have taken deposits on €750,000 apartments and are
now anxious to get the buyers to sign contracts so they can cut the prices of the many
remaining units to €600,000.
It is ironic that the government’s decision to abolish stamp duty for first time buyers has
allowed them to escape entirely from the new housing market. What was intended as a dig
out for the building industry may turn out to be one of the last nails in its coffin.
Given that nobody wants new houses, it is natural to ask who is going to buy the 80,000 or
so units that will be completed this year, and the 60,000 that are on stream for next. The
answer, although they may not know it yet, is the shareholders of Bank of Ireland, Anglo-
Irish and other builder-friendly banks.
While we can see banks starting to make a show of turning up the heat on smaller
developers, they have lent too much to large builders to allow them to fail. It is one thing to
chop a developer in Kilkenny off at the ankles if he owes you €16 million; it is quite
another to admit that a developer in South Dublin owes you €160 million, let alone to force
him into bankruptcy. Were any one of the several Dublin developers who are reputedly
unable to service any of their large borrowing to be driven into bankruptcy the ripple effect
on Dublin house prices and the value of other loans would be unpleasant.
Along with the many loans to builders that are already in the non-performing category, the
exposure to commercial real estate poses a grave threat to bank solvency, because of the
large sums involved and the highly leveraged nature of the borrowing.
Commercial real estate borrowing during booms follows the same pattern everywhere. You
put up 20 per cent of the price of an office block or warehouse and borrow the rest. As
prices rise, you use the equity gained in the first property as collateral for an 80 per cent
loan on a second property, and so on as long as prices keep rising.
In Dublin the 5 per cent rental yield allowed banks to charge a 5 per cent interest on
commercial real estate loans so investors could use rental income to cover interest
payments while they sat back and enjoyed double digit capital gains.
With lending rates based on 5 year Euro swaps now risen to over 6.5 per cent and rental
yields fallen to 4 per cent, new investors cannot cover interest from rent and are entirely
reliant on capital gains from rising prices. With commercial property prices slowing rapidly
and loans taken out a few years ago needing to be rolled over, there is a strong risk of a
sudden exodus from the market, and a collapse in prices. Because real estate loans are
collateralized mostly by equity in other leveraged real estate, they can rapidly become
almost worthless.
US experience shows that commercial property markets usually follow residential markets
downwards with a lag of twelve to eighteen months, and the Japanese market shows how
commercial real estate can fall in value by 80 per cent within a few years.
The large exposure of Irish banks to property speculators does not mean of course that
large losses are inevitable. What it does mean is that, if a crash occurs, or even if already
nervous overseas bond markets cut off liquidity to Irish banks (foreign banks have over
€400 billion on deposit with Irish banks, and hold another €200 billion of bonds), it will be
very costly to fix, dwarfing the bailout of AIB in the 1980s.
A partial bailout of Japanese banks cost their government 10% of national income, while
re-floating Finnish banks cost its government nearly 15 per cent of national income. In Irish
terms this would translate into a bill for taxpayers of €15 to €20 billion.
Bankers are well known for getting carried away during bubbles which is why
governments appoint central banks to keep an eye on them. You probably think that the
fact that Irish banks have given speculators €100 billion to gamble with, safe in the
knowledge that taxpayers will cover most losses, is a cause of concern to the Irish Central
Bank, but you would be quite wrong.
At a recent Irish Economic Association discussion of house prices, the Central Bank
official in charge of financial regulation (whose publications with the ultra-libertarian Cato
Institute strongly oppose any form of bank regulation: a real case of an atheist being
appointed an archbishop) stopped the proceedings to announce that the view of the Bank
was that, as long as international markets were happy to buy debt issued by Irish banks,
there could be no problem with their lending policies.
We can only hope that this insane logic is correct, and that the refusal on ideological
principle of bank regulators to regulate banks does not lead to the same debacle here that
occurred with Savings and Loan Institutions in Reagan-era America.

http://www.ucd.ie/economics/staff/mkelly/papers/solvency.pdf

leninbenjamin

is_that_so wrote: »

No we won't be. It was never a deposit problem, just a perception that some Irish banks were in danger and exposing them to the risk of a bank run. The increase in guarantee on deposits was to avoid runs on Irish banks and calm the nerves of depositors, not to invite the rest of Europe to put money in Irish banks. The other largely ignored, and IMO, far more important part of the bill, is to provide a State guarantee on loans which will help the banks borrow on interbank markets. This aids liquidity and helps mitigate the risk of a healthy bank defaulting,failing and pulling down the whole system.

yeah, that's a good summation of the problem. the access to funds on the interbank market is indeed the most important aspect of the entire proposal. Banks can now effectively borrow in the governments name, which greatly increases the creditors confidence in them and hopefully we'll see normal service resume sooner rather than later because of it.