Britain discusses bank options as shares drop

By Kate Kelland and Myles Neligan

LONDON (Reuters) - Britain promised on Monday to protect ordinary savers in the face of global financial turmoil but shares in the country's banks fell sharply amid fears the government would seek partial ownership in return for support.

Germany pledged on Sunday to guarantee private deposit accounts, following earlier moves by Ireland and Greece, and other European governments followed suit.

Britain said it was seeking details on Germany's plan before taking action.

"We can't leave ordinary people and ordinary savers unprotected under these sorts of circumstances," Junior Treasury Minister Yvette Cooper told BBC radio. "We are still expecting clarification from Germany."

Prime Minister Gordon Brown's spokesman said he would be speaking to German Chancellor Angela Merkel by telephone later on Monday.

Investors are worried measures being considered by Britain could include it injecting capital into UK banks in return for equity stakes, which would weaken their holdings.

"The obvious implication in the UK of a bank recapitalization program is that existing shareholders would be severely diluted," said Sandy Chen, banks analyst at Panmure Gordon.

Shares in all the UK's big banks dropped on Monday. The biggest loser was HBOS, which slid as much as 21 percent at one point before recovering some ground to trade down 14.7 percent at 7:20 a.m. EDT.

"The intimation of government intervention could lead people to think it might affect the terms of the (Lloyds-HBOS) transaction," said Simon Willis, banking analyst at NCB.

HBOS agreed to a takeover by UK rival Lloyds TSB Group last month in a deal facilitated by the UK government which waived competition rules to get it through.

The emergency action followed a steep fall in HBOS's share price which stirred fears about the bank's survival.

EQUITY STAKES

One option for the government to help ease a lending crisis and restore depositor confidence would be to provide capital to banks in return for equity stakes.

It could also take on more underperforming bank assets.

The government has already taken control of the UK's Northern Rock bank and last week nationalized the mortgage book of bank group Bradford & Bingley.