The prospect that a second British bank could be nationalised has intensified as regulators and politicians continued talks on Saturday over the future of troubled lender Bradford & Bingley.
B&B shares tumbled to a record low on Friday and the cost of insuring its debt jumped, prompting regulators to step up efforts to find potential white knights for the bank.
The Financial Services Authority and Treasury officials were meeting over the weekend to discuss rescue options, two people familiar with the matter said.
A Treasury source said: "There are contingency plans. We are in close discussions with the FSA and the Bank of England. A decision hasn't been taken."
Major banks were last week sounded out about rescuing the lender, but none were keen to take on its lending book at a time of weakening house prices, industry sources have said.
One option now is to arrange a "lifeboat rescue", where all the major lenders would take a share of B&B's mortgage book to help shore up confidence in the financial system.
Britain's top five banks - HSBC, Royal Bank of Scotland, Barclays, Lloyds TSB and HBOS - and Abbey's Spanish owner Santander already own about 30 percent of B&B between them after they stepped in to help save a rights issue that flopped in June.
But a reluctance among rivals for a rescue deal has increased the prospect the lender could be nationalised and merged with Northern Rock, the bank that was taken over in February after the government failed to find a rescuer.
Saturday's Daily Telegraph, quoting unnamed sources, said B&B would have to be nationalised in the coming days.
Finance minister Alistair Darling is expected to be closely involved in the talks. He has a range of powers to use for any bank in trouble, including bringing it into public ownership or to transfer it to another commercial bank.
B&B's shares fell to an all-time low of 16.5 pence on Friday and ended at 20 pence, valuing it at under 300 million pounds, as fears about its future mounted throughout last week.
The concerns have raised the cost for B&B to raise funds in wholesale markets, although B&B said it is fully funded into next year and has one of the strongest core equity Tier 1 ratios of any UK bank.
"We do not comment on speculation in such a febrile environment," a spokesman for B&B said on Saturday.
The FSA and Treasury declined comment.
There is concern that borrowers of B&B's higher risk mortgages, including a buy-to-let and self-certification loans, will default at a faster rate than averge mortgages and burn through the equity on its balance sheet.
The worries about its health will also hamper a strategic plan unveiled by new Chief Executive Richard Pym, which aims to make the bank more reliant on retail deposits.
The bank's savers have more security than when Northern Rock first ran into trouble, and savers are guaranteed that the first 35,000 pounds of any deposits are protected.Reuse content