British banks battered in wake of Paulson's U-turn on US bail-out

Published on Thursday 13 November 2008 20:33

SHARES in Royal Bank of Scotland, Barclays and other banks were hit yesterday in the wake of the US government's abandonment of the cornerstone of its $700 billion (£467bn) rescue effort for the financial system.

The new banking sector volatility came after Treasury secretary Hank Paulson revealed on Wednesday that the US administration had decided that using billions of dollars to buy up so-called toxic assets related to subprime was now "not the most effective way to use the bail-out package".

Shares in RBS last night closed down 6 per cent, or 3.4p, at 52.6p. Barclays lost 6.2 per cent, or 10.5p, to 157.7p and HSBC dipped 0.6 per cent, or 4.5p, to 695.5p.

They are the three British banks with the biggest exposure to the US and had been expected to be major beneficiaries of the US Treasury bail-out.

However, UK banks with less US exposure were also hit. HBOS retreated 7 per cent to 90p, while Lloyds TSB, in the throes of trying to take over HBOS, slid 3.6 per cent to 167p.

One UK banking executive said: "Many investors are looking at any excuse to 'sell the UK and go away', and Paulson's move gave more excuse.

"It came on top of the market digesting the grim news on recession from the Bank of England and also what the International Monetary Fund had to say about the UK's gloomy prospects. Bank stocks were bound to be affected by that."

One analyst added: "You've got to remember that Paulson's asset bail-out idea back in late September was initially very welcome to the UK banks. But it was overtaken by events in the shape of Gordon Brown's recapitalisation of the UK banks. Share prices in the sector are still looking for any negative news and Paulson's U-turn obliged."

Keith Bowman, banking analyst at broker Hargreaves Lansdown, said the US Treasury decision had "added to the nerves in the banking system generally".

However, Alex Potter at Collins Stewart, said although the volte-face by the US administration might be negative for UK banks "at the margins" initially, it was now widely accepted that the $700bn "was never nearly big enough".

The US Treasury had initially said foreign banks with significant US operations would be able to access the Troubled Asset Relief Programme (Tarp).

RBS first gained a foothold in the US with its 1988 acquisition of Citizens Bank in Rhode Island, but it also owns other financial institutions in Connecticut – Greenwich NatWest – and Ohio, where it has Charter One. The Scottish bank took a 5.9bn writedown on toxic assets in the first half of 2008, and it had been speculated that RBS might be able to offload billions of dollars of risky loans via Tarp.

Under the alternative UK Treasury-underwritten recapitalisation of the bank, the government could be left with nearly 60 per cent of RBS and up to 43 per cent of any Lloyds/HBOS combination.