[ForexNews]

The UK government announced its plans for Lloyds and RBS banks. Neither was very surprising. Lloyds plans to raise GBP21bn in capital through a rights issue and a swap of debt to contingent equity. The government will participate in the rights issue, thus keeping its ownership share of Lloyds at 43%. Lloyds will not take part in the asset protection scheme (APS) but has to pay a GBP2.5bn fee for the protection it has already received. RBS will take part in the APS but under revised terms - it will now bear a first loss of GBP60bn (previously GBP42bn). The government will inject a further GBP25.5bn of capital, raising its economic ownership to 84%. Both banks will have to sell some parts of their business to satisfy EU law on companies receiving government support.

What does this mean for GBP? Prior to the MPC decision on Thursday, investors are likely to be cautious, but there are three key issues to think about in terms of the long-run effect. First, it will add to government borrowing for this fiscal year. However, it reduces the government's potential liabilities and is a capital investment - it is getting something for the money. The Lloyds move in particular is encouraging from a longer-term perspective. Second, banking fragility and the access of credit to the UK economy are key issues. Here, there is probably little news. The government has reduced its insurance to both banks but that has become less likely to be needed over recent months. Finally, the divestment of some parts of the business means that some M&A activity will take place. The large UK banks will not be allowed to buy the existing businesses in order to promote competition in the UK banking sector, which adds to the likelihood that some investment will come from outside the UK. This could lead to some temporary strength for GBP.