Britain Set to Take Over Ailing Banks RBS, HBOS, Sources Say

British Prime Minister Gordon Brown's government is set to buy majority stakes in Royal Bank of Scotland Group and HBOS to contain the worst financial crisis since the 1930s, two people familiar with the matter said.

[Other media were reporting this development, including the Times of London, the Financial Times and the Wall Street Journal.]

The government will also name representatives to the boards of RBS, Britain's fourth-biggest bank, and HBOS, its largest mortgage lender, and will work closely with the management on issues including executive pay, the people said. They spoke on condition of anonymity because the information is confidential.

The crisis that began in the United States and toppled Lehman Brothers Holdings has spread worldwide and brought RBS, once Britain's second-biggest lender by market value, to the brink of state ownership. Brown acted to prop up the two Edinburgh-based institutions after Britain's benchmark FTSE-100 stock index fell 9 percent on Friday, the biggest one-day drop since 1987.

"The most precious asset of all is confidence, and it's something that's been lost in recent weeks," Brown told reporters in Paris yesterday. It is "something that we will restore through coordinated intervention."

The takeovers begin the implementation of a $85 billion rescue package announced by Brown last week for British banks struggling under seized-up credit markets and a plunge in home prices. In the past year, the government nationalized lenders Northern Rock and Bradford & Bingley and brokered the sale of HBOS to Lloyds TSB Group.

HBOS spokesman Shane O'Riordain said yesterday that deal is still "on track." He and RBS spokesman Linda Harper declined to comment on the prospect of the government controlling stakes.

Chancellor of the Exchequer Alistair Darling cut short a trip to Washington to enact the bank-recapitalization program. City Minister Paul Myners, a former chairman of Marks & Spencer Group, led talks over the weekend between the government and the banks. Discussions were ongoing to put finishing touches on the package for an announcement before markets open Monday.

RBS, which owns the National Westminster Bank, had 2,276 branches in 2006, more than any other British bank group, and 22 percent of the total, according to the British Bankers' Association. HBOS was the fifth biggest, with 1,002 branches. In contrast, Northern Rock and Bradford & Bingley together had 261 branches in 2006, 2 percent of the total in Britain.

RBS has an American subsidiary, Citizens Bank, which operates more than 1,200 bank branches across the Northeast and the Midwest. Citizens is the 13th-largest U.S. retail bank, with about $71 billion in deposits at the end of June.

Brown said yesterday that negotiations with individual banks weren't finished. "These are discussions with individual banks, not some blanket proposal," he said.

As part of the negotiations, "we will discuss with them executive remuneration, dividend payments and the resumption of lending that's necessary for small businesses and of course for homeowners and we will have individual discussions with the individual banks," Brown said.