REFILE-UPDATE 5-UK banks in govt funding talks as crisis grips

By Myles Neligan

LONDON (Reuters) - Britain will hold more talks with banks this week over a possible multi-billion pound injection of public funds, industry sources said as the credit crisis tightened its grip on Europe's main financial centre.

News that banks and Chancellor of the Exchequer Alistair Darling held talks on Monday evening sent shares in Royal Bank of Scotland (RBS.L: Quote, Profile, Research), Lloyds TSB (LLOY.L: Quote, Profile, Research) and Barclays (BARC.L: Quote, Profile, Research) sharply lower on Tuesday as investors feared their holdings might be diluted by a big government stake.

But the cost of insuring their debt fell on hopes the new capital would take the pressure off existing debt.

The next round of talks will focus on what form of equity the government would get for any injection of taxpayer's money.

"That's what they will be working on over the next couple of days," one industry source said. A second industry source said bank chief executives planned to take part in a conference call later on Tuesday. [nWLB2135]

According to a BBC report, RBS, Lloyds and Barclays estimate they may need 15 billion pounds ($26 billion) each to help them get through the crisis, which began in the United States last year when mortgages holders defaulted on payments. JP Morgan analysts calculated last week that major British banks had a total capital shortfall of 46 billion pounds using the Basel II capital adequacy standard.

"I think what this signals to me is that this isn't a situation where banks can muddle through," said Simon Pryke, head of global research at Newton Asset Management. "They're going to have to be recapitalised and they're going to be heavily dependent on government and the authorities for sources of funding."

Bank officials were keen to dismiss suggestions they had asked for money.  Continued...