Britain's government is providing extra capital to state-owned bank Northern Rock, which Tuesday reported a first-half loss of 585 million pounds ($1.15 billion) as bad debts on home loans more than doubled.
The government said it would strengthen Northern Rock's capital base by converting 400 million pounds of Treasury preference shares into ordinary shares.
It will also swap up to 3 billion pounds of outstanding debt into equity following the transfer of a Bank of England loan to the Treasury, which could be used at a later stage to boost capital.
Alistair Darling, UK chancellor, said the structure was the best way to support Northern Rock's financial stability, protect taxpayers and depositors, and comply with European state aid rules.
Northern Rock, which was taken under state control in February after failing to find a suitable buyer following a funding crisis, said it had cut the amount it had borrowed from the Bank of England by 9.4 billion pounds in the first half to 17.5 billion, ahead of its plan.
Under the bank's business plan unveiled after the government took control it had expected to be loss-making this year and not return to a profit until 2011. It said it remains on course to repay the government loan by the end of 2010.
Northern Rock said its loss was inflated by restructuring costs and a further writedown of 70 million pounds on toxic assets.
On an underlying basis, its loss for the six months to the end of June was 176 million pounds.
That included a loan loss impairment charge of 191.6 million pounds, up from 56.8 million a year before.
The share of its mortgages more than three months in arrears during the first half jumped to 1.18 percent, near the industry average and up from 0.45 percent at the end of December and 0.38 percent a year earlier, due to the lender tightening its arrears policy and the deteriorating UK housing market.
Arrears on unsecured loans also increased due to a tough economic backdrop, the bank said.
It wrote down 46.6 million pound on holdings of structured investment vehicles, adding to a 232 million charge last year. It also took a 23.8 million pound charge on holdings of collateralized debt obligations.