Lloyds Banking Group is under threat from nationalisation after it lost almost a third of its value on the stock market yesterday, seeing shares fall 31 per cent before rising slightly to close down 20.2 per cent.

Shares in the newly created ‘superbank’ – the product of a merger between Lloyds TSB and HBOS, which only become official in the last week – had more than £9billion wiped off its value yesterday, amid fears that the banking giant is headed for state-ownership.

The merger took place amongst strong criticism from some Lloyds shareholders who thought that it was too risky to save the struggling HBOS group. Many who have their savingsin Lloyds, especially pensioners, are now facing lower incomes and blame Lloyds for sacrificing its status as a relative safe haven by going ahead with the merger.

Lloyds Banking Group has refused a new cash injection of £7billion from the Government’s bail-out scheme, because this would mean relinquishing a majority stake to the taxpayer, who already holds a 43 per cent share in the banking group and would have taken 50 per cent if Lloyds had accepted the offer.

But, amid speculation that it will not survive the recession without state help, Lloyds Banking Group might be left with little alternative now that it has lost almost half of its value in the several days since its creation.

Other banks suffered drops in their share prices yesterday, as a result of fears that the Government’s second bail-out for the banks in six months will still not be sufficient to stabilise the economy.

After what has already been a difficult week for the bank, Royal Bank of Scotland lost another 11.2 per cent off its share value to close at just 10.03p, while Barclays fell 17 per cent to close at 72.9p.

Some senior MPs are calling on the Chancellor Alistair Darling to nationalise both Lloyds Banking Group and RBS, as they are contributing to the dwindling confidence in the UK’s banking sector. The taxpayer already owns a majority stake in RBS but it is not yet fully nationalised.

“If it is to happen, the sooner the better.” John McFall, chairman of the Commons treasury committee, wrote in the Financial Times today. “Let us get it over with and nationalise the pair of them.”

Even if the banks do regain some stability on their own, there is doubt that other banks would trust them enough to start lending freely between themselves, or that consumers would have sufficient faith in the banks to entrust them with their savings without the security of a Government guarantee.

Despite calls to do so, the Chancellor thus far seems reluctant to consign Lloyds TSB or RBS to the same fate as the other banks which have been nationalised in the last 12 months, which include Northern Rock and Bradford & Bingley.

But speculation is abound amongst investors that firms such as RBS and Lloyds Banking Group will soon have to seek further help from the Government – they both already received cash injections as part of October’s bail-out plan – which will push them closer to nationalisation.

© Fair Investment Company Ltd