Plunge in UK Banks Forcing Nationalization?

British banks shares continued to get hammered Wednesday as actions by the government to support the financial institutions were perceived negatively by shareholders and fears about possible nationalizations intensified.

Shares in Barclays were 19 percent down, having dropped to their lowest level since 1985, while Lloyds stock was down 12.5 percent. Barclays and Lloyds recouped some of the losses towards the end of the session.

However, shares in HSBC, which has denied speculation it may need government capital, were higher, while Royal Bank of Scotland, whose shares plunged 70 percent after it announced the biggest loss in UK corporate history, was also up.

"The main problem is that the various initiatives taken by the government have been positive in terms of preventing a financial meltdown and positive for creditors, but they've been negative for shareholders," Simon Adamson, banking analyst at CreditSights, told CNBC.com.

Sharon Lorimer FULL COVERAGE OF EUROPE'S BANKING CRISIS.

"The fear is that more capital will be needed and nationalization may be needed for one or more banks," Adamson said.

"It looks like the market is pushing the government towards it," he said. "It may well be that it becomes a self-fulfilling prophecy."

The British government threw banks a second multi-billion pound lifeline in three months Monday and gave the Bank of England the nod to pump cash into the ailing economy because interest rates are already close to zero.

The chairman of the British parliament's Treasury Committee urged the government on Wednesday to nationalize Royal Bank of Scotland and Lloyds, as the global financial crisis deepens.

Royal Bank of Scotland bought Dutch bank ABN Amro in 2007 at the height of the economic boom and analysts have said integrating the Dutch bank proved to be tougher than anticipated task in a weakening global environment.

RBS is 70-percent owned by the government.

Lloyds, in which the state has now a 43 percent stake, agreed to buy ailing UK rival HBOS last year, when the government was scrambling for a solution to keep the mortgage lender afloat.

But nationalization may not the best solution, as there is little difference between a 70 percent stake and a 100 percent state ownership, Adamson said.

• Commentary: UK Plays Market Whack-a-Mole

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