Europe Raises Stakes in Bank Bailout Race

The U.K. government is expected to unveil Monday morning a plan that could hand it control of two large banks, Royal Bank of Scotland Group PLC and HBOS PLC -- the latest in a series of aggressive government moves that are remaking the world's financial system with lightning speed. At the same time, Germany is set to approve on Monday a plan to prop its banking system that could involve up to €400 billion in taxpayers' money. It would be mostly in the form of guarantees for banks' borrowing, but with up to €100 billion earmarked for taking government stakes in banks, people familiar with the matter said. Germany has already fully guaranteed consumer deposits. European Press Photo European Union President Nicolas Sarkozy, with British Prime Minister Gordon Brown, after crisis summit at the Elysee palace in Paris Sunday. Australia, meanwhile, announced it was guaranteeing interbank lending as well as bank deposits. The United Arab Emirates said it would guarantee domestic bank deposits. France and Italy said they would also detail their national plans Monday. One country yet to act was Switzerland, home to UBS AG, which has taken large write-downs since the credit crisis began. After a weekend in which policy makers met in both Washington and Paris and pledged to devise a common approach to the crisis, the moves demonstrate a different reality: Each country is moving independently, forcing others to follow suit in taking major steps. With companies and people moving capital across borders, governments don't want their banks to be at a disadvantage. Yet even as they sometimes seek to outdo each other with national rescue plans, the broad contours of a global response are taking shape: Developed countries are investing directly into the banking system, acting to insure bank deposits, guarantee certain bank debt and in some cases nationalize banks. "There's an enormous amount of congruence around where we're headed here," said a senior U.S. Treasury official Saturday. U.S. Treasury Secretary Henry Paulson is finalizing details of a U.S. plan to inject capital directly into banks, a move similar to those announced by the U.K. and other European nations. The Treasury is expected to provide details of the program as soon as this week and it could be up and running shortly, say people familiar with the matter. In Europe, the 15 countries in the euro area agreed on a broad menu of measures to cope with the growing financial crisis. They include loosening "mark-to-market" accounting rules that force banks to book their assets at the price they would get if they sold them now. Leaders also repeated a pledge to save any distressed bank. The potential cost to governments keeps rising as they plan ever-more-ambitious measures to prop their banking systems. Last week, the International Monetary Fund said that $675 billion in capital would be needed by big global banks over the next several years. The U.K. and other governments have yet to spell out how they are going to pay for their packages. They are likely to have to issue new debt. It wasn't immediately clear exactly to which bank borrowings the government guarantees would apply or whether they would cover the vast and frozen market for short-term loans among banks. An early sign of how well the the moves are working will come Monday when 16 banks post dollar borrowing costs as part of the setting of the London interbank offered rate. The three-month dollar Libor has surged in recent weeks as banks pulled back from lending to each other. In the U.K., the government is now poised to be one of the world's biggest bank owners, after its recent purchase of parts of Bradford & Bingley PLC and the nationalization of Northern Rock PLC in February. Its expected move to buy a stake in HBOS comes after an initial plan to save HBOS through a merger with Lloyds TSB Group PLC came up short. A person familiar with the matter said the Lloyds deal is still expected to go ahead. The U.K. is accelerating a rescue package it unveiled just days ago in an effort to halt a dive in bank stocks. The capital injections at four of the largest U.K. banks are now expected to reach more than £35 billion, more than previously expected, owing to the deterioration in markets since the package was announced Wednesday. Last week, banks thought they had until the end of the year to raise capital. As part of the government intervention, RBS Chief Executive Fred Goodwin, who built his institution into one of the world's largest banks in his eight years at the helm, is expected to step down, people familiar with the matter said. He is expected to be replaced by Stephen Hester, chief executive of British Land Company PLC. For Mr. Goodwin, it is a big comedown from a year ago when RBS led a consortium in the world's biggest-ever bank deal, the $101 billion buyout of Dutch bank ABN Amro Holding NV. The U.K. is expected to inject £15 billion to £20 billion into RBS, though some of that could come from existing RBS shareholders. The measures agreed by European leaders Sunday give national governments a toolbox of approved measures. For example, national governments will have several options to help banks repay billions in debt coming due. European bank debt maturing between now and the end of 2009 totals some €1 trillion, according to a recent Keefe, Bruyette & Woods report. National governments, for example, will be able to guarantee new bank notes that mature within five years in a program that's available through the end of 2009. A ceiling hasn't yet been set. In allowing governments to loosen mark-to-market rules, EU leaders are touching on one of the most controversial issues of the global financial crisis. Bankers have complained that forcing them to value their assets at market prices at a time when markets aren't working has made their finances look worse than they really are. But loosening the rules could allow them to hide serious problems. Some European banks have complained that a strict application of accounting rules puts them at a disadvantage to their U.S. competitors, and write-downs caused by the rule could cause them to quickly burn through capital they raise. A decision on a new set of softer rules might be made as early as this week. In the U.S., the Treasury is expected to give guidance on the terms under which banks could qualify for a capital infusion. One option would be for banks to raise some private capital in order to qualify for an infusion. The Treasury and the Federal Reserve are also considering whether to implement a large-scale guarantee of bank lending similar to moves taken by the U.K., among others. For now, the British banks could have a huge advantage when it comes time to sell debt to nervous investors. The Fed has already taken several steps it hopes will help improve conditions in short-term-lending markets. Last week, for example, it announced a plan to buy, directly from the borrowers, up to $1.3 trillion of the common short-term corporate debt known as commercial paper. In Europe, the European Central Bank is considering accepting more types of commercial paper as collateral for loans. But for now, the ECB is not inclined to directly purchase this form of debt. ECB policy makers are considering several options to help thaw frozen interbank lending markets. The ECB is particularly concerned about money-market funds, which have seen big redemptions by institutional investors. The ECB is considering letting the parent banks of such funds post money-market-fund assets as collateral for central-bank funding. After a weekend of intense meetings, the U.K. Treasury and four of the U.K.'s biggest banks -- RBS and Barclays PLC, as well as HBOS and Lloyds -- are expected early Monday to detail how they will raise at least £35 billion, including how much each bank will raise from British taxpayers and from private investors. Plans were still in flux Sunday evening, with government officials and their advisers expected to work through the night hammering out details of the plan. The U.K.'s steps are so sweeping that officials in London weighed delaying stock trading on Monday. They decided not to. The U.K. plan was originally crafted, in the weeks following the Lehman Brothers Holdings bankruptcy filing, by Treasury officials, the banks' CEOs and bankers at UBS and the U.K. affiliate of J.P. Morgan Chase & Co. A lack of details and concern about weakening financial markets sent bank stock prices down on Thursday and Friday. Much of the market's concern in recent days focused on RBS, which is facing the double-whammy of a rapidly falling stock as well as looming billions of pounds of debts. RBS shares closed Friday at half of what they were at the start of the week, at 71.70 pence. On Monday, Barclays is expected to say it plans to raise between £5 billion and £7 billion and that it won't need government help. The bank, which is in the process of integrating the North American operations of Lehman, is likely to leave the door open to return to the government for help. Late Sunday night, HBOS was looking at raising about £12 billion, with the U.K. government likely taking a controlling stake. The move by HBOS signals that its planned merger with Lloyds, a government-prodded effort, was not enough. Still, a person familiar with the matter said that deal is expected to go ahead. With RBS, the U.K. is expected to underwrite a capital injection. Existing shareholders will be offered the chance to take a piece of the offering, but it is unlikely they will take enough to keep a majority of the shares in private hands. The U.K. government is expected to put representatives on the boards of banks in which it buys common shares. The government stepping in to control RBS will have repercussions for the U.K. economy. RBS is a giant lender, with 62% of its income generated in the U.K. The bank has a £282 billion U.K. loan portfolio, lending to British homeowners, credit-card users, and real-estate companies. The bank, which had a £1.8 trillion balance sheet as of June 30, is expected to dramatically cut back on lending in coming months, a move that could send the economy into a deeper funk.. In Germany, Volker Kauder, leader of Angela Merkel's conservative bloc in parliament, said guarantees for interbank lending alone could reach as much as €250 billion. German Finance Minister Peer Steinbrück told German tabloid Bild that the banking bailout would cause Germany to miss its target of balancing its budget by 2011, a longstanding government goal.