UK under pressure to act as banks slide

By Paul Hoskins

LONDON (Reuters) - Finance minister Alistair Darling does not want to be rushed into rescuing Britain's ailing banking system but he may have little choice if he is to avoid falling into the trap of doing too little too late.

Shares in British banks plunged for a second day on Tuesday after Darling told parliament the previous evening he would only announce plans for any rescue package when he was ready, adding to confusion as to what form it might take.

"The failure of politicians to agree on concerted action highlights their inability to grasp the gravity of the situation or to focus on complex solutions," said Catherine MacLeod, economist at BDO Stoy Hayward Investment Management.

"The glaring omissions in political debate ... suggest that we are in for a bumpy ride."

Prime Minister Gordon Brown and Finance Minister Alistair Darling were meeting on Tuesday evening with the heads of the Bank of England and Financial Services Authority as pressure mounted on the government to take swift action.

The BBC said late Tuesday the government was poised to announce a comprehensive rescue package for the banking system, including the possibility of injecting capital into banks. Sky Television said the plan would be unveiled on Wednesday morning.

A banking industry source told Reuters the government's failure to follow up weekend press reports it was mulling an injection of taxpayers' money with concrete proposals had contributed to Tuesday's slump in share prices.

"Everyone saw the Chancellor's (Darling's) statement in the house yesterday, which was a pile of rhubarb, rhubarb. It just seemed empty after what had been floated in the media," the source said. "This is spectacularly unhelpful."

There is also a danger that simply boosting the capital of banks by buying new shares will fail to address the main problem at the heart of the crisis: the lack of trust among banks and the resulting paralysis in wholesale money markets.

"It looks to me in many ways like the attempt to stabilize the situation is backfiring because what they are doing is attacking the capital issue, not the funding issue," said Nigel Myer, banking credit analyst at Dresdner Kleinwort.

"Liquidity is an immediate life-and-death issue, whereas capitalization is a long-term problem."

STERLING WORRIES

Vince Cable, economics spokesperson for the opposition Liberal Democrats, praised a "sensible" case-by-case handling of the banking crisis so far, bailing out Bradford & Bingley and brokering a takeover of HBOS by Lloyds TSB.

But however anxious the government may be to ensure any scheme is effective and to avoid the tribulations that plagued the U.S. bailout package finally passed by Congress last week, Cable said renewed clarity was needed in such dangerous times.

"It probably will have to come forward with a proposal earlier than it is comfortable with simply to deal with the uncertainty," Cable told BBC radio.