Treasury poised to nationalise ailing bank

Takeover plan as B&B rescue stalls
World waits for US bail-out decision
Bradford and Bingley bank sign
Bradford and Bingley bank sign. Photographer: David Sillitoe David Sillitoe/Guardian

The government was last night drawing up plans for the emergency nationalisation of the Bradford & Bingley mortgage bank after last-minute attempts to engineer a rescue takeover by Spain's Banco Santander ran into difficulty. An announcement of the bank's fate will come later today.

If it is nationalised, the intention is to place B&B in government hands on a temporary basis to give Santander and other possible purchasers more time to decide whether they are prepared to do a deal. Treasury sources said there is no way the government will allow the bank to open tomorrow with its immediate future uncertain, for fear of a Northern Rock-style run by savers.

It was also feared that B&B shares, which fell to a low of 20p last week, would sink further when the stock exchange opened for trading at 7am tomorrow. The government has been in discussions with Santander for over a week but the Spanish do not want to take on B&B's toxic assets without some guarantee of official support, and a deal could not be tied up in time. Temporary nationalisation will give it more breathing space. The government hopes that Santander will still end up buying B&B. An alternative solution is to carve it up between Santander and giant British bank HSBC.

Barclays bank is understood to have been involved in the talks as well, but to have walked away. If a commercial solution cannot be found, then the government concedes it will have to remain on the taxpayers' books for some time, posing huge political and financial risks for the Treasury. The move came amid signs that the bank's customers were becoming increasingly alarmed over its parlous state.

Yesterday, Sue Matthews, a 46-year-old housewife from Clifton, Bristol, was one of the many who were transferring their life savings. 'I have decided to withdraw all my funds. My savings are bigger than the amount the government promises to protect,' she said. In many other B&B branches across the country customers were seeking advice and reassurance about their savings.

A Treasury spokesman said: 'We, the FSA and the Bank of England are working closely with Bradford and Bingley to consider the implications for their business of the recent financial turmoil.' Nationalisation of the bank is likely to be opposed by the Tory party. Senior sources said the party, which argued against taking Northern Rock into public ownership, was highly sceptical of such a move, and would prefer a direct sale to private hands.

Meanwhile, frantic talks are under way in Washington in an effort to agree a $700bn rescue package for America's beleaguered financial institutions before the markets reopen tomorrow. Talks are also under way over the troubled Wachovia bank.

The urgency to resolve the future of B&B was heightened by concerns about Fortis, one of the largest banks in the Low Countries. Belgian and Dutch officials were fighting over the weekend to maintain confidence after shares in Fortis fell on Friday. Fortis and B&B are the latest in a string of meltdowns around the world, including that of Washington Mutual bank and the distressed takeover of the UK's largest mortgage bank, HBOS, by Lloyds TSB.

The Tories have indicated that they would support a takeover of B&B by Santander, but not another nationalisation. Shadow chancellor George Osborne will unveil proposals today to prevent runs on failing banks, including government guarantees that customers would get their money back within a week. He will also propose that savings should be protected up to a limit of £50,000, rather than the current £35,000.