Britain’s largest banks are urging the UK government to rethink the terms of its £37bn bank bail-out scheme as investors take fright at the requirement for the banks to stop paying dividends to shareholders. The government’s condition on dividends has undermined the share prices of RBS, Lloyds TSB and HBOS – the three key participants in the rescue – making it more likely that the government will be forced to take up its full shareholding in the banks. All three lenders are now trading below the price at which the government has committed to buy the shares, leaving it with a paper loss Tuesday night of £2.8bn. Under the terms of the bail-out, the three banks will be unable to pay dividends to ordinary shareholders until they have fully repaid a combined £9bn in preference shares. Bank executives have said the conditions for the preference shares, which pay fixed interest of 12% and cannot be redeemed for five years, will prompt the banks to rein in their lending – the opposite of the scheme’s aim. Executives are also asking if they can quickly replace the preference shares, either by selling assets or by raising additional capital from private investors.
