Bank Shares Plummet

Banking shares have plunged after news that major UK banks had met with Chancellor Alistair Darling to discuss Government fundraising.

Royal Bank of Scotland (RBS) shares dropped 17%, HBOS tumbled 14%, Lloyds TSB fell 11% and Barclays were down 5%. Barclays has strongly denied that it has requested financial help from the Government. RBS and Lloyds TSB have both declined to comment.

Treasury rescue plan

The Treasury is understood to be putting together a plan that would involve the Government providing extra cash to the banks in exchange for stakes in them.

Lending problems

Also depressing shares in RBS, which owns NatWest bank, has been the recent news that the ratings agency S&P has downgraded it. This effectively means that S&P think it is a less safe institution to lend money to. This will only make things worse for RBS. It is the difficulty banks are having in borrowing money from each other that is at the root of the credit crunch.

As banks find it increasingly difficult to borrow from each other, they have been forced to borrow from the Government instead, to the sum of £200 billion over the past year.

Global banking gloom

Things are getting tougher for foreign banks also. The Government of Iceland has had to take control of the country’s second biggest bank Landsbanki. Landsbanki owns the internet bank Icesave, which is now preventing customers from withdrawing money.

If Landsbanki were to fail, savers would be refunded their first £16,000 from the Icelandic Government and then up to £34,000 from the UK Financial Services Compensation Scheme. But claims from the UK would all be handled by the UK authorities.