Government and Butterfield Bank have struck an historic deal that will bolster the bank's capital base by $200 million and allow it to withstand a severe economic downturn.

Finance Minister Paula Cox said yesterday the move was aimed at "preserving the stability and resilience of the Bermudian economy and protecting bank depositors".

Financial regulator the Bermuda Monetary Authority (BMA) has required all the Island's banks to ensure they have a "capital buffer" which would keep them on a solid footing even in the case of a dramatic worsening of economic conditions.

The bank, which yesterday announced a net profit of $4.8 million for 2008, said it needed the extra money to meet the regulator's heightened standards. Butterfield had first tried and failed to raise the capital from the private sector.

The slump in US housing prices impacted Butterfield last year, through the decline in value of the bank's investments in securities backed by US mortgages. Many banks around the world have suffered a similar problem.

Capital G Bank, part of the Edmund Gibbons Ltd. Group, said yesterday that its parent company had added $20 million to bolster the bank's "capital buffer" to levels that "far surpass international standards".

Capital G chief executive officer John Kephart said Bermuda residents should "feel assured that their deposits are safe".

HSBC-owned Bank of Bermuda said it had no need to raise capital.

The Bermuda Stock Exchange (BSX) yesterday suspended trading in Butterfield Bank shares, which have fallen by more than 30 percent in the first nine weeks of this year.

In a statement, the BSX said it took the action "to allow the company's shareholders and the market to absorb the importance of today's announcement". Trading in the bank's shares will resume on Monday.

Under the deal signed on Thursday, Butterfield will issue $200 million of non-convertible preference shares, with both the principal and the dividends being guaranteed by Government, which will in turn receive a guarantee fee of one percent per annum. Government has agreed to buy any of the shares not snapped up by private investors by the end of June.

In exchange, the bank has issued 10-year warrants to Government to buy four percent of the bank's shares at an exercise price of $7.01. The agreement drew support yesterday from Opposition finance spokesman Bob Richards, who said that maintaining confidence in the banking sector was paramount.

In last month's Budget statement, Ms Cox announced a huge rise in the public debt ceiling to $1 billion, including a provision for $250 million to be used when the Island's economy faced "systemic threat".

Minister Cox announced the Butterfield deal in the House of Assembly yesterday.

The bank had approached the Ministry of Finance after fruitless efforts to raise capital on the world's currently treacherous capital markets.

"In the national interest and in the true spirit of public-private partnership", Ms Cox said, Government had agreed to support the $200 million preference share issuance.

"In making this commitment, Government was cognisant of its role in preserving the stability and resilience of the Bermudian economy and protecting bank depositors," Ms Cox told MPs. "Government was also conscious of the obligation to protect the interests of taxpayers."

In addition to the warrants and the guarantee fees, Government will also be paid a higher coupon rate than private investors on any preference shares it subscribes, she said. The rate of return is yet to be decided.

The deal includes some checks and balances to protect the public investment, including "preventing any gratuitous or extraordinary payments to executive officers of the bank".

As the bank's operating divisions were continuing to perform well, Ms Cox said she was confident Butterfield would be able to generate the earnings necessary to meet its commitments.

And the chance to invest in Government-guaranteed preference shares was a real "opportunity", she said.

Late last night, she updated the House: "Already some benefits have been seen. Butterfield Bank was placed on CreditWatch Negative by Standard & Poors. They have come out and said that it is CreditWatch Developing."

She added that as a result of yesterday's move there has been interest "by persons wishing to purchase those shares".

Ms Cox said: "We are living in extraordinary times and therefore extraordinary but purposeful actions will be required to maintain our collective confidence as a community and to map the way towards a full economic recovery."

Butterfield chairman Robert Mulderig said yesterday: "The board believes this additional capital will enable Butterfield to deal effectively with current market conditions and take advantage of longer-term opportunities when the markets stabilise.

"We are appreciative of the Government's support of our capital raise in a market that, even for a bank as highly rated as Butterfield, would have made it difficult to raise capital privately."

The Bermuda Government has stepped in to help private businesses before, but the scale of the Butterfield deal is unprecedented.

In October 1985, package holiday company Halmar collapsed under a $4.8 million mountain of debt. Government chipped in with some $2 million to save the Bermuda holidays of 10,000 tourists.

And in 1998, the Government provided $2 million to Sea Land Construction, over and above the contract price, to ensure the firm completed its work on the Westgate Correctional Facility.