What The Banking Bailout Means For You

What difference will the bail-out make to your life? Will it make you richer or poorer?

Thirty-seven thousand million pounds. I mean, £37,000,000,000. Or rather, £37bn.

No matter how small you write it, the Government's £37 billion bail-out of the banks is a mind-boggling, tummy-turning, eye-popping amount of money. Your money.

So how are the banks going to spend it? What difference will the bail-out make to your life? And most importantly, will it make you richer - or poorer?

Borrowers

As part of its investment, the Government has agreed with the banks it has bank-rolled (Royal Bank of Scotland, Halifax, Bank of Scotland, Lloyds TSB and Natwest) that it will "maintain, over the next three years, the availability and active marketing of competitively-priced lending to homeowners and to small businesses at 2007 levels".

What does this mean? The Government wants the banks to make a larger amount of money available for UK homeowners and small business owners to borrow. "We want to make sure the UK has a wide range of affordable mortgage products available and lending doesn't dry up," a HM Treasury spokesperson told me.

This follows news that banks approved just 32,000 new mortgages in August - that's only a third of the 104,000 lent every month, on average, in 2007.

The trouble is, since 2007, lenders have tightened their criteria dramatically and this is no bad thing. For example, nowadays, most lenders don't lend to borrowers with credit problems or those without a deposit.

The Government says it doesn't want this to change. "We don't want to see a return to 110% mortgages or risky lending decisions," the HM Treasury spokesperson said.

But it is a little difficult to see how lenders can lend to fewer people than they did in 2007 and still return to 2007 volumes of lending.

At the end of the day, I think this statement is a bit of a red herring. Long-term and across the market, the Government's £37 billion to a couple of banks will have little effect on the volume of mortgage lending. In my view, house prices will have to stabilise and banks will have to start lending to each other again before we will a real easing-up of credit in the mortgage market.

Homeowners facing repossession

The bailout certainly is good news for homeowners facing repossession. The bank-rolled banks will have to "support schemes to help people struggling with mortgage payments to stay in their homes". In plain English, this means the banks will have to treat homeowners facing repossessions better. The details aren't yet clear but, for example, it could mean lenders will allow borrowers in dire straits to take payment holidays or make smaller payments instead of starting repossession proceedings.

Savers

The bail-out is also good news for savers. By part-nationalising the banks and sending a clear message to the markets that British banks will not be allowed to fail, the Government will hopefully manage to stabilise the banking sector. This should mean savers who are worried about the safety of their savings can rest easier in their beds.

Investors

I think the bailout is good news for most investors, especially as the Government's plan has been mimicked on a global scale, with the US and Europe also offering similar bailouts to their banks.

This should get money circulating around the system again, and should help to increase confidence in the markets.

.And the bad news?

It's not all good news, sadly. The Government has taken a huge risk with taxpayers' money, and it could well backfire if the economy doesn't recover quickly enough. (Read this article for a more in-depth analysis of the risks of the scheme).

Furthermore, as with Northern Rock, the Government may not wish to engage in aggressive competition with the few independent banks that are left (namely Barclays, HSBC, Santander and the building society Nationwide).

Similarly, the part-nationalisation of the banks demonstrates that banks cannot be allowed to fail - and therefore the Government cannot allow banks to take risks in the future that they took in the past. Especially now that they've got taxpayers' money in their coffers.

So the move is likely to lead to a huge expansion in the regulation of banks. This will mean a lot more red tape and potentially a much slower and unwieldy banking system, leading to less innovation . The City has objected to this in the past. But in my opinion, greater scrutiny of banks going forward is no bad thing.

What do you think?