By Keith Weir
LONDON (Reuters) - Iceland's financial authorities took over the country's second largest bank Tuesday and shares in some of Britain's biggest banking names tumbled, the latest victims of the global financial crisis.
Western governments and central banks faced demands for coordinated action after Australia responded to the growing crisis by cutting its interest rates by 100 basis points.
Iceland, a country of 300,000 in the North Atlantic, is battling to stave off national bankruptcy after its banks took on massive debts in expanding overseas.
The country's market authority took control of Landsbanki using sweeping new powers introduced overnight. Russia would provide a loan of 4 billion euros ($5.44 billion), the Icelandic central bank said.
In a further sign of the fear gripping markets, shares in some of Britain's biggest high street banks fell sharply again on reports of funding talks between the government and banks.
Royal Bank of Scotland was the biggest loser, with its shares down more than percent to a 13-year low.
Responding to the crisis, Australia's central bank slashed its benchmark cash rate by 100 basis points, the biggest single cut since 1992. Investors hoped that central banks in Europe and the United States could follow suit.
U.S. officials have called for a "forceful and coordinated" global reaction to kickstart anemic bank lending but such a unified approach remains elusive.
"Policymakers urgently need to get some traction in their policy initiatives, if disaster is to be avoided," Barclays Wealth told its clients in a note.
"Policymakers cannot make any more mistakes: the clock is ticking, and it is one minute to midnight," it added.
RATE CUTS?
European Union finance ministers were meeting in Luxembourg to try to flesh out promises to counter market mayhem and ensure no savers lose any money. The EU has been criticized for its fragmented response to the crisis and the way individual countries have broken ranks with deposit guarantees.
"We need to find a common solution as one country's solution may be another country's problem," said Swedish Finance Minister Anders Borg.
The banking upheaval that began on Wall Street has effectively shut down interbank and other loan markets, pushing industrialized countries closer to recession. Conditions remained poor for interbank lending.
Sparked by the collapse in the U.S. housing market and increase in bad loans, the crisis is the worst to hit the banking world in 80 years. People around the world are worried about protecting their savings and keeping their jobs as some of the pillars of global finance give way.
Economists said the Australian rate cut might be followed in Europe and the United States.
"If the need is there to get rates down toward something that's more neutral, then why dilly dally? Get it done in one go," said Brian Redican, an economist at Macquarie. "It's a flexibility other central banks should take careful note of."
Japan's central bank, with far less room to maneuver, voted to keep rates unchanged, but gave a grim prognosis for the economy that hinted at more actions to boost liquidity.
Fed fund futures have priced in a probability of a 75 basis-point cut by the U.S. central bank this month.
The Bank of England is expected to cut rates Thursday and the European Central Bank last week flagged it too could lower its rates.
However, there were already doubts about whether the aggressive rate cut in Australia could shock the country's banks back into lending, with the National Australia Bank holding off on lowering its standard variable rate until markets calmed.
(Reporting by Reuters bureaus worldwide; Editing by Jean Yoon and Ralph Boulton)
