The recent turmoil in financial markets across the globe has exposed the vulnerability of countries with even moderate exposures to financial globalisation. Accordingly, various governments are busy designing ?rescue packages.? But only the US and UK have so far come up with structured plans spelling out broad mechanisms, whereas Ireland, Germany, Spain and others have floated piecemeal plans and Iceland is still on the verge of bankruptcy

Financial ailments on both sides of the Atlantic have similar root causes. A low interest rate at the beginning of the decade coupled with the housing price bubble led banks and FIs to expand their nets to clients who might not have qualified for loans under stricter standards. These institutions also sold securities to investors based on mortgages with a slice that had a greater likelihood of default, involving underwriters, insurers, rating agencies among others, in the process. They created securities of a complex nature, whose values became dubious once the bubbles started bursting and the number of defaults piled up, leading to a stampede towards the exits. Then the value of these institutions? assets fell far short of the value of their liabilities and the whole system got severely undercapitalised, while the ratio of debt to equity started crossing into the danger zone. In response, banks started disbursing fewer loans, the inter-bank market froze and the commercial paper market started contracting, finally leading a severe credit crunch.

The picture is the same on both sides of the Atlantic. In Britain, bank assets have declined by ?340 billion in a six-month period, with the London inter-bank rate rising to an incredible 5.84% this week. In the US, the market for commercial paper contracted by 10% in July. In both cases the solution lies in infusing fresh equity into the ailing institutions. As markets are not functioning properly, governments are intervening to improve private entities? balance sheets, to prevent a systemic failure.

But British and American approaches are different in both style and substance. The Paulson approach reserves $700 billion for buying back the distressed mortgage backed securities via reverse auctions. The UK approach is offering the willing eight banks a stake in preferred shares of up to ?50 billion, guaranteeing new debt to the magnitude of ?250 billion and preparing to infuse extra liquidity if needed.

The success of the Paulson plan is depending crucially on its ability to boost the price of MBS, which should attract private investors to the market and help discover these assets? real prices. The UK approach resembles a partial nationalisation of the overall assets (not just the toxic parts) and a direct infusion of fresh capital, which should boost up market confidence and incentivise inter-bank loans immediately. In spirit, the UK plan is closer to the Swedish bail-out plans (adopting draconian measures towards privatisation) executed in the nineties.

British banks are different from their US counterparts at least in two aspects. First, the loan to deposit ratios of the British banks average almost 140%, much higher than the US figure. Second, unlike in the US, most British banks have a presence in both deposit and brokerage markets. These factors make the UK banking system more vulnerable to current shocks.

Another big difference between the US and UK is the latter?s geographical proximity to other European countries, which makes it more vulnerable to its neighbours? policies. Ireland, for example, has just announced 100% insurance for the depositors and bond holders with its major banks. Germany has announced full insurance for all its depositors. Events like this could easily lead to a cross-border capital flight. In response, the UK has also increased its deposit insurance ceiling to ?50,000. These developments suggest coordinated efforts. Given the diversity of countries within the EU and the polarisation of their opinions, it remains to be seen whether the EU comes up with a concerted rescue plan in these times of despair.

The author is reader in finance at the University of Essex