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UK banks in govt funding talks as crisis grips

LONDON - Britain will hold more talks with banks this week over a possible multi-billion pound injection of public funds, an industry source said as the credit crisis tightened its grip on Europe's main financial centre.

News that the talks began on Monday night between the banks and Chancellor of the Exchequer Alistair Darling sent shares in Royal Bank of Scotland, Lloyds TSB and Barclays sharply lower on Tuesday as investors feared their holdings might be diluted by a big government stake.

But the cost of insuring the banks' debt fell on hopes the new capital would take the pressure off existing debt.

“I think what this signals to me is that this isn't a situation where banks can muddle through. They're going to have to be recapitalised and they're going to be heavily dependent on government and the authorities for sources of funding,” said Simon Pryke, head of global research at Newton Asset Management.

“The important thing to put across is that governments are very focused on rescuing their banking systems but that doesn't necessarily mean rescuing bank shareholders.”

A BBC report said RBS, Lloyds and Barclays estimate they may need 15 billion pounds ($26 billion) each to help them get through the crisis, which began in the United States last year when mortgages holders defaulted on payments. JP Morgan analysts calculated last week that major British banks had a total capital shortfall of 46 billion pounds using the Basel II capital adequacy standard.

Bank officials were keen to dismiss suggestions they had asked for money.

“Contrary to press rumours, Barclays has not requested capital from the government and has no reason to do so,” Barclays Chief Executive John Varley said. RBS released a statement saying much the same..

The industry source told Reuters the next round of talks will focus on what form of equity the government would get for any injection of taxpayer's money.

“That's what they will be working on over the next couple of days,” the source said.

The Financial Services Authority's director of banking, Thomas Huertas, cancelled a speaking appointment on Tuesday morning, and a spokesman for the banking regulator said: “There's a lot going on and you would expect us to be speaking to people.”

Britain's action comes as governments around the globe fight to restore confidence in banking and unfreeze lending and borrowing brought to a halt by fears of hidden losses.

In the latest of a series of emergency actions, Iceland's authorities took over the country's second largest bank and Russia announced an aid package for its financial sector.

The UK Treasury declined to comment on the talks, but a spokesman repeated that Darling, Britain's finance minister, has said he will do whatever is necessary to maintain stability.

Shares drop

Shares in Royal Bank of Scotland (RBS) were the biggest UK sector loser on Tuesday, falling almost 40 percent at one point. They were off 25 percent at 111 pence at midsession, giving the bank a market value of $40 billion. Shares in Lloyds TSB shares fell 7 percent and Barclays shares fell 4 percent.

However, five-year senior credit default swaps on RBS were about 30 basis points tighter at 270 basis points and about 20 basis points tighter at 230 basis points on Barclays, a trader said. That means investors have to pay 270,OOO and 230,000 euros to insure 10 million euros of the respective banks' debt against default.

Short sterling futures jumped as the bank shares tumbled and as weaker-than-expected economic data strengthened demands for a Bank of England rate interest cut later this week.In Britain's response to the crisis up until this week, Lloyds TSB has agreed a government-brokered takeover of another bank, HBOS , while smaller mortgage lenders Bradford and Bingley and Northern Rock have been nationalised.

RBS raised a record 12 billion pounds in fresh capital earlier this year. Barclays raised 4.5 billion pounds in July from investors including Qatar and Japan's Sumitomo Mitsui and only last month raised a further 701 million pounds from a share sale.