UPDATE 3-London Scottish Bank enters administration

Mon Dec 1, 2008 11:26am EST

* Treasury says retail deposits safe

* LSB says potential buyers still interested

(Adds E&Y statement)

LONDON, Dec 1 (Reuters) - London Scottish Bank LSB.L, a small British lender, said on Monday it had gone into administration after failing to plug a gap in its capital reserves.

In a statement, the UK Treasury said no savers would lose money as a result of LSB's collapse, even if their savings exceeded the 50,000 pound ($77,150) ceiling set by the Financial Services Compensation Scheme.

"The Chancellor has put in place arrangements to ensure that all eligible retail depositors in London Scottish Bank will receive their money in full, including those with balances above the current 50,000 pound FSCS limit," the Treasury said.

LSB had about 10,000 savings account holders and total retail deposits of 273 million pounds at the end of June this year.

The company's shares, which were suspended on Monday, closed at 2.6 pence on Friday, giving it a market value of 3.7 million pounds.

The Financial Services Authority said it had decided LSB should be stopped from taking further customer deposits on Sunday as it no longer met the "threshold conditions for authorisation" as a bank.

LSB said it had sought an administration order from the courts the same day, and that accountants Ernst & Young had been appointed as administrators.

LSB has been operating with less capital than the regulatory minimum since the beginning of the year, when the company revealed that the introduction of new Basel II capital rules for banks had opened up a shortfall of 13 million pounds.

LSB attempted to plug the gap through disposals, raising 28.5 million pounds by selling its factoring subsidiary in July, but the group still had a capital deficit of 12 million pounds at the end of August.

The company, which focused on unsecured consumer lending and also ran a debt collection business, considered a 45 million pound capital increase earlier this year but did not go ahead with the plan.

LSB revealed in June that it was in talks with potential suitors, and said on Monday that while some were still interested, there was no certainty an offer would materialise.

E&Y executive Tom Burton said LSB would remain open for business while continuing to look for a buyer.

"The company will continue to operate as normal and the administrators will be seeking to find purchasers for, and will continue to manage, the remainder of the company's business and loan book to maximise recovery for creditors," he said in a statement.

Manchester-based LSB employs 700 people. (Reporting by Myles Neligan; Editing by David Cowell)

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