Government set "for majority stake in RBS"

Oct 12 2008

The government could take a majority stake in Royal Bank of Scotland as part of a £35 billion lifeline being thrown to UK banks, it was reported today.

RBS is to ask the government to underwrite a £15 billion cash call, while mortgage lender HBOS is requesting up to £10 billion, with Lloyds TSB requiring £7 billion and Barclays £3 billion.

The Sunday Times said the moves could result in the government becoming the biggest shareholders in RBS and HBOS, potentially giving it seats on the boards of the banks.

The scale of the fundraising could lead to trading on the London Stock Exchange being suspended on Monday so traders can digest the impact of plans. It could also lead to Lloyds TSB renegotiating the terms of its HBOS takeover, although both banks remain committed to the deal going ahead.

Talks with Treasury officials are said to be taking place today to determine the take-up of the £50 billion capital raising which was offered by the government on Wednesday. The Treasury declined to comment today.

Bank of England governor Mervyn King has reportedly told the banks to ask for more than they need, meaning their capital position would be strengthened sufficiently to absorb shocks and a long recession.

The money will be raised by the government underwriting an issue of ordinary shares, meaning those shares not taken up by existing investors will be owned by the government.

The shares will be placed in a newly created bank reconstruction fund that would hold the stock until market conditions improve.

RBS is now worth less than £12 billion after losing 61% of its market value during last week’s stock market slump. It raised that amount during a rights issue in the summer.

Barclays, which has already said it is considering raising capital from other sources, may return to the same wealthy oversees funds behind its £4 billion fundraising earlier this year.

The efforts of the UK government to bail out banks has so far failed to thaw frozen money markets. As shares took their latest plunge into the red on Friday, overnight lending rates between banks jumped 0.4% to 5.81% - more than 1% above the Bank of England’s official 4.5% base rate.

Three-month lending rates - a key measure in pricing mortgages - also rose again to 6.285%, nearly 2% above base rate.

Longer-term lending between less well-capitalised institutions has virtually ground to a halt due to mounting fears they might not get their cash back.

Banks that raise sufficient capital will be given a £250 billion government guarantee on new debt issues.