U.K. Banks Seek Government Funding Plan to Help Restart Lending

By Ben Livesey and Poppy Trowbridge

Sept. 27 (Bloomberg) -- British banks are proposing the government help bail them out of losses from the credit crunch so they can resume lending, said four people with knowledge of the discussions.

Industry executives held talks this week about different options, including the establishment of a so-called bad bank, run by the government. It would take over assets including mortgage-backed securities that declined in value with the collapse of the U.S. subprime home-loan market, said the people, who declined to be identified because the negotiations are confidential.

``The economic downturn is gathering momentum,'' George Magnus, senior economic adviser to UBS AG in London, told Bloomberg Television yesterday. ``The mortgage industry is pretty much dead. The government does have to do something.''

The push by U.K. lenders for government money comes as U.S. lawmakers consider a $700 billion rescue plan for the banking system. Prime Minister Gordon Brown backed last week's takeover of HBOS Plc by Lloyds TSB Group Plc to keep the nation's largest mortgage lender from succumbing to the global credit crisis.

Chancellor of the Exchequer Alistair Darling and Bank of England Governor Mervyn King have indicated their opposition to using taxpayer money to support bank lending.

``A hundred billion pounds is available to help the banks get through the system,'' Darling said on Sept. 19. ``So we're dealing with the problems, we're doing it slightly differently to the Americans.''

Daily Talks

Government officials from the Treasury, central bank and Financial Services Authority are talking daily with commercial banks about how to preserve the stability of the financial system. None of those authorities would give details of the discussions.

``We're not going to comment on individual institutions,'' Michael Ellam, a spokesman for the prime minister, told reporters traveling yesterday with the U.K. leader in New York.

Bradford & Bingley Plc, the U.K.'s biggest lender to landlords, fell to a record low in London trading yesterday on concern it won't be able to raise money in capital markets. Royal Bank of Scotland Group Plc, Britain's second-biggest bank, has been scaling back lending to shore up capital.

``There is a severe crisis'' in the money markets, said Neil MacKinnon, chief economist at ECU Group Plc in London and a former U.K. Treasury official. ``The U.K. should take a leaf out of the U.S. book and look at a government-backed rescue.''

`Liquidity Scheme'

The so-called tripartite authorities overseeing the U.K. financial system are also considering options including an extension to the ``special liquidity scheme'' set up April 23 to spur interbank lending, according to the people involved in the matter. The emergency lending program lets banks swap mortgage securities shunned by bond investors for government bonds. The plan was due to end next month and will now run until Jan. 30.

FSA spokeswoman Kirsty Clay declined to confirm or deny reports about the plan. She also refused to comment on Bradford & Bingley, citing the regulator's policy of not talking about individual companies.

The financial crisis has triggered the biggest slump in the U.K. housing market in at least 25 years and is threatening to push the economy into recession.

To contact the reporters on this story: Ben Livesey in London blivesey@bloomberg.net; Poppy Trowbridge in London at ptrowbridge@bloomberg.net.