LONDON (Reuters) - Shares in British banks fell sharply on Tuesday on reports the big industry players had held emergency funding talks with the government overnight, traders said.
Royal Bank of Scotland (RBS.L: Quote, Profile, Research, Stock Buzz) was the biggest loser, with its shares down 39 percent at 98 pence.
Lloyds TSB (LLOY.L: Quote, Profile, Research, Stock Buzz) shares fell 20 percent and Barclays (BARC.L: Quote, Profile, Research, Stock Buzz) fell 12 percent. All three banks declined to comment on the reports. The UK Treasury also declined to comment but said it would do whatever it takes to maintain stability in the banking system.
The BBC said the three big banks had asked the Treasury for 15 billion pounds ($26 billion) each.
A report by Bloomberg LLP said the government may invest at least 45 billion pounds ($79 billion) in banks including Royal Bank of Scotland Group Plc and Barclays Plc to bolster capital depleted by mortgage-related losses. It cited two people with knowledge of the situation.
"There is a report of them (Barclays and RBS) seeking funds," a trader said.
The cost of insuring the debt of the three banks fell sharply on the reports. Five-year senior credit default swaps on RBS were about 30 basis points tighter at 270 basis points and about 20 basis points tighter at 230 basis points on Barclays, a trader said. That means investors have to pay 270,OOO and 230,000 euros to insure 10 million euros of the respective banks' debt against default.
The credit trader said the move was based on speculation that the government is considering injecting capital in banks in return for equity stakes.
"It's more of an equity story, as it look like shares will be diluted, while a capital increase is credit positive which explains how the CDS has reacted," the trader said.
(Reporting by Dominic Lau and Natalie Harrison; Writing by Dan Lalor and Andrew Callus; Editing by Quentin Bryar)
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