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BANK SHARES FACE MORE TURMOIL OVER RESCUE BID

BRACED: The stock market is prepared for another day of volatile trading

Monday October 13,2008

By Peter Cunliffe, Deputy City Editor

THE stock market is braced for more volatile trading today in response to co-ordinated international moves to stabilise the banking system.

Bank shares could undergo massive swings as investors and traders weigh up the impact of plans to shore up their balance sheets, potentially resulting in part-nationalisation for some of them.

European leaders were last night working on ways of providing extra capital to ensure no more major financial institutions fail, while the U.S. government was on standby to pump money into its remaining investment banks, Morgan Stanley and Goldman Sachs.

Treasury officials were thrashing out details of refinancing plans for Britain’s banks that could involve the Government taking control of Royal Bank of Scotland (RBS) and Halifax Bank of Scotland (HBOS).

Lloyds TSB and HBOS last night insisted their planned merger was still on track. But there was speculation that Lloyds may seek to alter the terms.

Details of the recapitalisation are due to be announced today before the start of trading on the London Stock Exchange.

The exchange said it planned to open for business as usual, though there was speculation last night that some bank shares could be temporarily suspended.

RBS, which raised £12billion through a record rights issue this year, was working on plans to raise up to £15billion to bolster its balance sheet and meet Government targets.

It will seek funds from existing and new investors through a share placing which analysts expected to be priced low so shareholders would think it too good to miss.

RBS chief executive Sir Fred Goodwin is expected to stand down, to be replaced by British Land chief Stephen Hester, though he could retain a role overseeing the fundraising.

The Government is set to get boardroom representation in keeping with its shareholding at the end of the process. A low take-up by investors could see it left with a majority stake in RBS.

The speed and scale of the UK scheme has been stepped up following massive falls on world stock markets and the International Monetary Fund’s warning that the global financial system was near meltdown.

Bank of England Governor Mervyn King is thought to have told banks to ensure they raise enough capital “to withstand significant shocks”.

HBOS is expected to seek up to £10billion, with £5billion for Lloyds and £7billion for Barclays, though Barclays is keen to avoid having to tap the Government.