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Is UK Banks Nationalization Inevitable?

Thursday, 22 Jan 2009 | 11:56 AM ET

Voices in favor of nationalizing major UK banks to save them from a mauling in the markets strengthened Thursday, sending banks' share prices into a roller coaster of hope and dismay.

Barclays, which Wednesday had dropped to the lowest level in 24 years, was up 7 percent in the morning, but closed 10.4 percent lower.

Royal Bank of Scotland whose shares plunged 70 percent Monday after it announced the biggest loss in UK corporate history, jumped 20 percent in the morning but ended 2.4 percent lower.

Lloyds stock, which fell 13 percent Wednesday, started the session up 18 percent and closed 8.9 percent up, while HSBC rose 2.2 percent by the close.

British Treasury minister Paul Myners rejected the idea of bank nationalization, saying the government wanted to support a return to an effective banking sector, but analysts say a takeover by the state may be difficult to avoid.

"I think we're moving inevitably towards nationalizing the major banks and I think we should, not just because that's the way to recapitalize them but we also need a big culture shift and strategy shift in the way banks operate, and it's the best way to do it," author and economist John Kay told CNBC.

"Actually what we need to do is banks need to be boring, risk-adverse and a lot more bureaucratic than they have been in the past 10 years," Kay told "Squawk Box Europe."

Banks need to return to their "dull" old model of taking deposits, lending money and making the payment system operate, Kay added.

Sharon Lorimer

Banks shares had been hammered by talks of nationalization, as this option would wipe shareholders out.

"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.

"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.

"At this point it would probably be cheaper to nationalize troubled banks than throw good money after bad money," Marino Valensise, Chief Investment Officer at Barings Asset Management, said. "If you nationalize the banks, one thing you can do right away is to write down the troubled assets completely."

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