The U.K. government yesterday (Wednesday) announced its own banking bailout package with an $87 billion (50 billion pound) recapitalization plan for the ailing British financial sector.

“The global market has ceased to function,” British Prime Minister Gordon Brown said yesterday at a press conference in London. “The banking system must be sounder, and that is why we are putting the capital in.”

Under the plan, the U.K. Treasury will provide $43.5 billion (25 billion pounds) to recapitalize banks and boost their Tier 1 capital ratio. A bank’s Tier 1 capital ratio is a key indicator of the firm’s financial strength. An additional $43.5 billion (25 billion pounds) will be available if needed.

In addition, the Bank of England, the nation’s central bank, will increase the amount of funds available for short-term lending to $346 billion (200 billion pounds). The plan further guarantees an additional $432 billion (250 billion pounds) in loans.

“The Bank of England will take all actions necessary to ensure that the banking system has access to sufficient liquidity,” the central bank said in a statement, The Financial Times reported. “In its provision of short-term liquidity the Bank will extend and widen its facilities in whatever way is necessary to ensure the stability of the system.”

The Bank of England also cut its benchmark lending rate a half-point bringing it to 4.5%. [Please click here for a related story on the coordinated global central bank rate cuts in today’s issue of Money Morning.]

The following banks plan to take advantage of the government assistance:

• Abbey National PLC, a wholly owned subsidiary of Spain’s Banco Santander SA (ADR: STD),
• Barclays PLC (ADR: BCS),
• HBOS PLC (ADR: HBOOY),
• HSBC Holdings PLC (ADR: HBC),
• Lloyds TSB Group PLC (ADR: LYG),
• Royal Bank of Scotland Group PLC (ADR: RBS),
• Standard Chartered PLC,
• And Nationwide Building Society.

Other U.K. banks and building societies are invited to apply for the program as well, The FT reported.

Britain’s blue-chip FTSE 100 Index hit a four-year closing low as it dropped 5.2% despite the government’s bailout package and the rate cut.

“These measures will not, of course, prevent the recession which is already underway. The aim is to reduce the risk that recession turns into depression,” Citigroup Inc. (C) economist Michael Saunders told MarketWatch.

Saunders cautioned that additional government measures could be needed to stabilize the British economy, including further capital infusions.

“We are probably not even half way through the decline in U.K. house prices. We are not even close to half way through the U.K. recession,” Saunders said. “Much of the economic pain still lies ahead.”

Source: U.K. Unveils Its Own Banking Bailout Package