Bank bailout massively boosts government exposure

By Myles Neligan and Steve Slater - Analysis

LONDON (Reuters) - The UK government's bank bailout scheme seems to have triggered a palpable change in financial market sentiment but it leaves the taxpayer massively exposed to potentially risky assets.

Under the scheme, the government will own or part-own lenders controlling nearly 3 trillion pounds in assets and almost half the mortgage market, heightening taxpayer exposure to a faltering economy.

While the government aims eventually to sell its holdings at a profit, analysts warn it could take many years to achieve this if the banks' debt-backed securities and loan books suffer further value erosion as economic conditions deteriorate.

Northern Rock, already under state control, underscored the concerns on Tuesday as it said 1.87 percent of its mortgages were more than three months in arrears, jumping from 1.18 percent just three months ago.

That will be a worry for government.

Banks were told to raise their original estimates of how much extra capital they needed before final levels were agreed late on Sunday, reflecting concerns over the impact of a possible recession, people familiar with the matter said.

Under Monday's bailout plan, Britain will underwrite a 15 billion pound share issue for Royal Bank of Scotland, and buy a further 5 billion pounds in RBS preference shares.

Merger partners Lloyds TSB and HBOS will receive up to 17 billion pounds in public money between them.