Fears more UK banks could fall
a.. Larry Elliott and Jill Treanor
The UK government was bracing itself last night for further casualties after a
day of panic on the world's financial markets prompted fears that the
nationalisation of Bradford & Bingley would have a domino effect on the banking
sector in Britain.
With Germany, France, Iceland, Belgium, the Netherlands and Luxembourg joining
the list of casualties of the year-long credit crunch, a plunge in bank shares
in the City prompted a drop of 5% in London's FTSE 100 Index.
The authorities had hoped that the bail-out of B&B would help to draw a line
under the financial crisis. But Lord Turner, the new chairman of the Financial
Services Authority, indicated that this was not the end of the crisis. "We are
not necessarily right at the end of this process," he told BBC Radio 4's The
World At One. "At the moment we believe our other high street banks are well
capitalised and in a reasonable condition, but we will have to keep this
situation under review."
Hear our business editor Deborah Hargreaves explain the options Link to this
audio
Last night Gordon Brown made it clear that he was ready to intervene to protect
Britain's financial system after the extraordinary events in the US. He said:
"The governor of the Bank of England, the chancellor and I will take whatever
action necessary to ensure continued stability."
The FTSE closed more than 250 points lower, adding to the problems of Britain's
pension funds, and was on course for its biggest one-month drop since the
stockmarket crash of October 1987.
Gold and government bonds soared as investors sought safe havens, while oil,
share prices and sterling all suffered. The pound had its biggest one-day fall
for 15 years after the B&B rescue and the release of figures showing that
mortgage lending had fallen to 5% of its level before the crisis began last
summer.
The chancellor, Alistair Darling, has been lobbied to adopt a UK version of the
US bail-out plan for toxic mortgages, as well as to introduce a more permanent
standing facility from the Bank of England that would allow billions of pounds
to be poured into the financial system.
The FTSE 100 endured its eighth largest percentage point fall in history, with
only one stock in the FTSE 100 of blue chip shares ending the day higher - the
supermarket chain Morrisons. Royal Bank of Scotland at one point lost 20% of
its value, while Lloyds TSB, in the throes of an emergency takeover of HBOS,
hit fresh lows. HBOS shares were off 18%.
The share price movements came after a series of dramatic events in the
financial markets:
. Bradford & Bingley was nationalised just before the stock market opened in
London and its 200 branches and £20bn of deposits were sold to Santander of
Spain.
. Fortis became the biggest continental European casualty of the crisis and was
bailed out by the governments of Luxembourg, Belgium and the Netherlands.
. Citigroup announced the takeover of the US commercial bank Wachovia.
. Iceland took a 75% stake in the country's third biggest bank, amid fears that
the move could bankrupt the country.
. Germany arranged a credit lifeline for the commercial real estate lender Hypo
Real Estate.
The turbulence came despite the world's central banks injecting fresh liquidity
into the markets in an attempt to persuade banks to start lending to each
other. The mood of extreme caution, however, left the rates at which banks
borrow from each other at their highest since the credit crunch began in August
last year.
It is understood that some of the major banks have floated the idea of putting
toxic mortgage assets in the government's coffers in exchange for more liquid
bonds. It is thought that not all the banks are in agreement about the proposal
and the Treasury is unconvinced about the plan. A Treasury source said the
chancellor was keeping all options open, but that a US-style plan was not in
the offing.
Richard Lambert, director general of the CBI, said: "What's happening to bank
shares makes no economic sense. We have to have confidence that they will
survive." Analysts were mesmerised yesterday by the share price movement in
Lloyds TSB and HBOS, following the £12bn takeover agreed two weeks ago, saying
it showed the level of fear in the market.
"I'm trying to be open-minded about other surprises there might be," said James
Eden of Exane BNP Paribas. "Can you imagine Lloyds walking away from HBOS? The
share price is telling you there is a chance of that happening."
Darling insisted that nationalisation of B&B was necessary after sustained
falls in its share price raised concerns that savers would pull their savings.
"We had to stabilise the situation in order to protect the banking system as a
whole," he said. The Treasury was determined that it was "business as usual"
for the bank's 2.6 million savers - whose deposits have been sold to the
Spanish bank Santander - and the mortgage customers who now owe money to the
government.
Darling made it clear that the government was standing behind the banking
sector and used £4bn of taxpayer funds to protect deposits in B&B that fell
outside the Financial Services Compensation Scheme, which protects the first
£35,000 of savings. The government is also lending the scheme £14bn to fund the
guarantees. The bill will ultimately be picked up by the banks which fund the
scheme.
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