Financial crisis: Nationalisation fears as ministers prepare to control banks

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The Treasury is prepared to take controlling stakes in Britain's biggest banks and to put government representatives on their boards to halt the financial crisis, it was disclosed.

By Edmund Conway, Philip Aldrick and Patrick Hennessy

Last Updated: 10:27PM BST 11 Oct 2008

The Government will do "anything it takes" to prevent the financial system collapsing, including taking more than 50 per cent stakes in banks, sources said.

The radical proposals go significantly further than Gordon Brown's original bail-out unveiled last week. It will spark suspicions that the Prime Minister may have to take more drastic action, even going so far as to nationalise the entire banking system.

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Mr Brown will fly to Paris on Sunday to urge European leaders to follow the "British model" of handling the credit crunch by propping up their ailing banks with taxpayers' money.

The Prime Minister will deliver his message in an unprecedented appearance at a meeting of leaders of the "eurozone" countries in the French capital. Britain – which retains its own currency and is outside the eurozone – is normally excluded from such gatherings but Mr Brown has been invited to the emergency session to discuss how to save stricken lenders and stave off another meltdown next week on European markets.

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Experts suspect that it may have to take a majority stake in Royal Bank of Scotland, while it will also have major holdings in HBOS, Lloyds TSB and Barclays under the plan.

A Government source said: "The test for intervention is dealing with systemic risk. You do whatever it takes to ensure the system avoids that." The source indicated that the Government would consider placing representatives on the board of the banks in which it took major shareholdings, saying: "We would have certain views and rights as a shareholder.

"If you have a more significant stake, then clearly in terms of protecting your interest, you would need potentially more control. The more significant your investment, the more significant your control."

Although the Government is not actively planning the full nationalisation of the entire banking system, such an option is regarded as an emergency alternative if the bail-out fails to arrest the market chaos.

The Government is desperate to restart lending in the money markets. "If they don't start lending to each other, credit will be restricted and we're guaranteed a 1930s-style depression," said Mark Thomas, the banks analyst at Keefe, Bruyette and Woods. "Nationalisation is the only option left when all else has failed to get the markets to open up again."

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Despite the British rescue package, the money markets have stubbornly refused to open up as banks and asset managers hoard cash for fear of defaults at any institution with which they deposit it. Three-month Libor, the price at which banks are willing to lend to each other, rose on both Thursday and Friday after the bail-out was announced.

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Others pointed out that once the Government was guaranteeing much of a bank's operations it might as well nationalise the institution. Under plans to recapitalise the industry, the Government might end up with a majority stake in Royal Bank of Scotland if its shares fall any further.

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Sandy Chen, the banks analyst at Panmure Gordon, said: "Nationalisation of the whole industry seems a bit extreme. I see only RBS and Barclays needing something like that."

Downing Street sources last night said that Mr Brown will today recommend to his European counterparts that they adopt the "British model". One official said: "We are not suggesting our model is imported lock, stock and barrel, because different countries have different circumstances. But we believe its strengths are that it offers three pillars – liquidity, funding and capital."

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http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3180207/Financial-crisis-Nationalisation-fears-as-ministers-prepare-to-control-banks.html