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." 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.Fears more UK banks could fall
Larry Elliott and Jill Treanor
Tuesday, 30 September 2008
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