U.K. Treasury Under Pressure to Take Stakes in Banks

By Gonzalo Vina

Oct. 6 (Bloomberg) -- Chancellor of the Exchequer Alistair Darling is under increasing pressure to take equity stakes in British banks and to extend a guarantee on deposits to stem the impact of the worldwide credit crisis.

David Cameron, the leader of the U.K.'s Conservative opposition, and former Bank of England Deputy Governor Howard Davies said the Treasury should take more action to firm up banks. The Treasury has repeatedly declined to rule out any action and didn't address what it termed speculation today.

``We will do whatever it takes to get Britain through this,'' Yvette Cooper, chief secretary to the Treasury, told BBC Radio 4 in London today. ``We are prepared to take radical action where it is needed. Governments across the world have had to take unprecedented steps.''

Prime Minister Gordon Brown's government is reviewing the impact of Germany's decision over the weekend to guarantee bank deposits. Darling will make a statement to Parliament at 3:30 p.m. Cameron wrote in today's Financial Times that he'd support steps to recapitalize banks if the crisis worsened.

``It is possible to imagine the circumstances in which government injections of capital, with proper safeguards and strict conditions, may be the best way to safeguard the long- term interests of the taxpayer,'' Cameron wrote in the FT.

Davies' View

Davies, who also has served as head of Britain's Financial Services Authority, told the BBC that governments should consider following billionaire investor Warren Buffett's lead and take stakes in banks to bolster their funds.

``Governments are going to have to do something like that in order to signal to wholesale markets that they stand behind the institutions and that governments have some skin in the game,'' Davies, who is currently director of the London School of Economics, said on BBC radio.


Yesterday, Darling said he was ``looking at some pretty big steps which we would not take in ordinary times.'' He didn't give any details of what he was considering. Banks are pressing for the Treasury to create a ``bad bank'' that would take on distressed assets to clean up the industry's balance sheets.

More liquidity is needed ``to get interbank lending going and money markets going,'' former Chancellor of the Exchequer Ken Clarke, a Conservative lawmaker, said on Bloomberg Television. ``I hope he (Darling) is going to announce something to put fresh capital into the banks.''

Buffett's Example

Goldman Sachs Group Inc. raised $5 billion in a stock offering on Sept. 24 and gained an endorsement and a $5 billion cash infusion from Buffett. ``I don't think full nationalization should be necessary. Taking a 10 to 20 percent stake as a signal to the market that the government stands behind it may well mean you could get out of that stake once markets return to normal.''

Britain nationalized Northern Rock Plc in February and seized the loan book of Bradford & Bingley Plc last month. For now, Treasury officials are looking harder at whether to extend their assurances over bank deposits after Ireland, Greece and Germany extended their guarantees.

``It now seems likely that most or all European governments will have to follow with complete guarantees for all or almost all private deposits,'' Michael Saunders, chief Western European economist at Citigroup Inc. in London, wrote in a note to clients. ``Now that several countries have taken this route, it will be hard for any other government to claim they do not want to follow or cannot afford to.''

Executives' Advice

Brown earlier today met with his new National Economic Council including Cabinet ministers and 17 executives who will meet government officials twice a week to offer advice on the crisis. Barclays Plc Chairman Marcus Agius is on the panel along with Vodafone Group Plc Chairman John Bond, Lloyds TSB Bank Plc Chairman Victor Blank and Dick Olver of BAE Systems Plc.

Chancellor Angela Merkel said private account holders will have their savings guaranteed as the German government yesterday sought to reinforce confidence in the banking system while salvaging a bailout of Hypo Real Estate Holding AG.

Merkel made her pledge as the government worked on a new bailout package for Hypo Real Estate after the property lender said commercial banks withdrew support for a 35 billion-euro ($48 billion) plan.

Brown's spokesman, Michael Ellam, said British officials understand from their German counterparts that the government in Berlin will not propose legislation covering that country's bank guarantee.

``The government isn't going to speculate on possible policy options,'' Ellam said at his daily briefing with journalists. ``Our understanding is that the German government will not be brining forward legislation for a legally binding guarantee. We are in the process of seeking clarification.''

Brown spoke with the prime ministers of Denmark and Iceland and French President Nicolas Sarkozy along with the head of the International Monetary Fund and European Central Bank.

To contact the reporters on this story: Gonzalo Vina in London at gvina@bloomberg.net