Royal Bank of Scotland falls 71pc despite new UK bailout

SHARES of Royal Bank of Scotland plunged by as much as 71 per cent to a new low amid fears the UK Government will fully nationalise the struggling lender, which expected to report a £28 billion ($60 billion) loss for the year and admitted that more could be on the way.

RBS' loss, which will be confirmed on February 26 when it announces it full-year results, emerged as the Government revealed a second package of measures designed to encourage banks to start lending money again to ease the credit crunch.

As part of the measures, RBS revealed that the Government will increase its current 58 per cent stake in the bank to 70 per cent. Last October, the Government injected £20 billion into RBS as part of the Treasury's first banking bailout attempt

Both Gordon Brown, the Prime Minister, and Alistair Darling, the Chancellor, refused to comment on whether RBS will be fully nationalised, joining Northern Rock, which became state-owned last year.

However, speculation is mounting that RBS will be taken into state-ownership and the bank spooked investors after it admitted that it may announce even more losses on top of the £28 billion loss.

It will be the biggest loss in UK corporate history, more than double the current record set by Vodafone, the telecoms giant that reported a £15 billion deficit in 2006.

Shares of RBS plunged as much as 70.6 per cent. They rallied a little to close down 23.1 pence, or 66.57 per cent, at 11.6p. The bank's shares peaked at 607p in February 2007.

Stephen Hester, chief executive at RBS, who took over from Sir Fred Goodwin last year, said: "The world remains an uncertain place.

“We can all be sure there will be future significant credit losses but we can’t be sure of what amount and what timing…all banks are facing uncertainties.”

RBS blamed £20 billion of its losses on last year's acquisition of ABN Amro, the Dutch bank.

The Prime Minister said he was "angry" with the bank.

Mr Brown said Britons had a right to be furious at "irresponsible" behaviour which saw RBS spend billions last year acquiring ABN Amro, the Dutch bank which had exposure to US sub-prime mortgages, as well as investing directly in the American home loan market.

“Yes, I’m angry about what happened at the Royal Bank of Scotland," he said.

The bank's expansion strategy was led by Sir Fred. Sir Tom McKillop, the chairman at RBS who worked closely with Sir Fred, is being replaced Sir Philip Hampton, the chairman at J Sainsbury, who joins the bank but will take over the role in April when Sir Tom retires.

Mr Brown added: "Now we know that so much was lost in sub-prime loans in the US and now we know that some of that was related to the purchase of ABN Amro, I think people have a right to be angry that these write-offs are happening and that these write-offs were caused by decisions that were made about international investments that were clearly wrong investments.”

Commenting on the need for a second bailout of British banks, Mr Darling said: “There is no doubt that because the economic downturn has been much sharper, especially over the last few weeks, that has exacerbated the situation.”

While the Government will increase its stake in RBS, rival Lloyds TSB, which will be known as the Lloyds Banking Group after officially taking over HBOS, is reportedly fighting against increase state-ownership.

As part of last year's first attempt at stabilising the UK banking sector, Lloyds TSB and HBOS, owner of Halifax and Bank of Scotland, took £17 billion in funding from the Government in exchange for a 43 per cent state in the combined bank.

Mr Darling said: “I have said that in the longer term, I don’t believe that governments ought to be running banks. Provided that they are properly supervised and regulated, provided their boards take proper decisions on who they lend to and they lend responsibly.”

Mr Brown and Mr Darling appeared at a joint media conference in order to deflect criticism over introducing a second bailout of the banking sector just three months after a first attempt.

The Prime Minister denied that the Government was writing a “blank cheque” for the banks, and there would be “legally binding” commitments in return for state support.

Banks will be encouraged to lend again under new measures announced by the Government.

The latest deal with the banks will require the taxpayer to pour billions of pounds into the troubled companies in the form of guarantees for new lending and the purchase of a range of loans and other assets now on their books, in addition to the £37 billion funding pledged in October.

The actual eventual cost is at this stage impossible to quantify, but some experts have warned that the resulting huge rise in Government borrowings could put intolerable pressure on the public finances.

Details of the package include the extension of the £250 billion credit guarantee scheme announced with the last group of measures in October until the end of this year.

There is also a new facility to guarantee loans and mortgages issued by the banks to encourage them to lend again, while there is a new scheme replacing the existing arrangements, which end this month, providing banks with access to Government bonds in return for other assets.

The Bank of England will set up a special fund to buy high quality loans and other assets direct from the banks, to be funded by the Treasury, with an initial £50 billion set aside.

The Treasury said that the package was designed to reinforce the stability of the financial system and increase confidence and the banks' capacity to lend.

A statement said that over the past two months, since the last raft of measures to help the banks and the November pre-Budget report, "the global financial and economic situation has continued to deteriorate".

The Treasury and the banks were in negotiations over the weekend after it became apparent that the October package was not enough to rebuild confidence in the financial system and persuade the banks to open their coffers again.

Mr Darling said that the measures were needed because if the banking system collapsed, the economy "would come down with it".

But he also said regulation of the banking sector would be reviewed, stating that "in the world we’re living in just now we do need to look again at the way we supervise and regulate these banks”.

There have been worrying signs that even successful and profitable companies have been refused access to much-needed credit, while the rash of collapses and bankruptcies of companies, such as Woolworths, have caused concern over existing debt.

Northern Rock confirmed that it was slackening off its attempt to reduce its mortgage book and would as a result be repaying loans to the Government at a slower rate.

It would mean that more of its customers would be able to keep their mortgages with the bank.