Sept. 29 (Bloomberg) -- Bradford & Bingley Plc, the U.K.'s biggest lender to landlords, was seized by the government after the credit crisis shut off funding and competitors refused to buy mortgage loans that customers are struggling to repay.

Banco Santander SA, Spain's biggest lender, will pay 612 million pounds ($1.1 billion) for Bradford & Bingley's 197 branches and 20 billion pounds of deposits, the company said in a statement today. The Santander, Spain-based bank said it also got 18 billion pounds to insure those deposits.

``The bank's deposit base has value in this market, but you'd have to have a different name over the door,'' said Alex Potter, a London-based banking analyst at Collins Stewart Plc.

Bradford & Bingley became the second British bank after Northern Rock Plc to be nationalized this year as survivors of the global credit crunch balk at swallowing all the risks facing weaker competitors. Governments around the world are stepping in to prevent bank failures, with regulators in Belgium, the Netherlands and Luxembourg injecting 11.2 billion euros ($16.3 billion) to save Fortis. Regulators in the U.S. seized Washington Mutual Inc. on Sept. 26 and sold assets to JPMorgan Chase & Co.

The U.K. Treasury will take over Bradford & Bingley's 41 billion pounds in mortgage loans. In return, the government gets rights to any gains as the bank sells off assets, including personal loans and its headquarters in Bingley, England.

`Biggest Challenge'

``The biggest challenge for the U.K. government will be to manage the bank's bad loans,'' said Leigh Goodwin, a London-based analyst a Fox-Pitt Kelton Ltd. ``Nobody else wanted the mortgage assets, which is not a good sign for the sector.''

Compensation rules in the U.K. mean other financial firms will have to cover Bradford & Bingley's 14 billion-pound insurance policy to protect depositors. A short-term loan from the Bank of England will initially cover the amount falling on the banks.

Santander will pay the additional 4 billion pounds to protect deposits over the 35,000 pound maximum amount covered by the U.K. regulator's compensation plan.

Bradford & Bingley is the second U.K. lender to fall under Santander, which become the country's second biggest mortgage lender and third-biggest deposit holder. Santander agreed to buy Leicester, England-based Alliance & Leicester Plc for 1.26 billion pounds in July following its 2004 takeover of Abbey National for 9.2 billion pounds. It now has almost 1,300 U.K. branches and control about 10 percent of consumer deposits.

Cancelled Shares

About half of Bradford & Bingley' employees will be moved to Santander under the deal, Chancellor Alistair Darling to told the BBC in an interview today.

Santander fell 4.2 percent to 10.46 euros in Madrid, giving the bank a market value of 65.4 billion euros, the second biggest in Europe after HSBC Holding Plc.

Bradford & Bingley's shares were cancelled in London before the market opened today.

The credit crunch made it impossible for Chief Executive Officer Richard Pym, 59, to fund Bradford & Bingley's lending. Deposits at the bank amounted to slightly more than half of loans outstanding, which forced it to depend on now-frozen capital markets. Pym will run the bank as public ownership begins, the U.K. Treasury statement said.

Britain's Financial Services Authority determined Sept. 27 that Bradford & Bingley didn't meet the minimum requirements as a deposit taking bank. The Treasury, Bank of England and FSA said they took immediate action ``to maintain financial stability and protect depositors while minimizing the exposure to taxpayers.'' Any payoff for shareholders will be determined in ``due course,'' the government said.

`Wiped Out'

``In a nationalization, shareholders get wiped out,'' Potter said. ``That's just the risk investors take.''

Bradford & Bingley was the smallest of four British building societies that transformed themselves from customer-owned lenders to publicly traded mortgage specialists as Britain's housing market boomed. It was created in the 1964 merger of the Bradford Equitable Building Society and the Bingley Building Society, both established in 1851.

The combined company sold shares on the London Stock Exchange in December 2000 and had a market value of 3.2 billion pounds as recently as March 2006. This year, the shares plunged 93 percent to 20 pence on Sept. 26, reducing Bradford & Bingley's market value to 289 million pounds, even after raising 400 million pounds in its third attempt to replenish capital.

Bradford & Bingley tried to survive by slashing new loans and said last week it would fire 370 mortgage advisers to save about 15 million pounds a year.

Not Enough

The measures weren't enough to entice other banks to take on Bradford & Bingley's mortgage business. Falling home price and rising unemployment in Britain have pushed up late mortgage payments to more than 2 percent of its loans. That compares with the U.K. average of 0.5 percent, according to the Council of Mortgage Lenders.

Almost half of Bradford & Bingley's 42 billion pounds of loans went to landlords, bringing its share of the U.K. buy-to-let market to 19 percent. Arrears on loans to buyers who rent out their properties rose from 0.73 percent at the end of 2007 to 1.1 percent by June 30, according to the council.

About 17 percent of the bank's loans went to customers whose incomes weren't verified. They typically have a higher level of default than standard borrowers. Bradford & Bingley's bad debts in the first half jumped to 74.6 million pounds from 5.3 million pounds last year.

Northern Rock

U.K. officials tried for most of the year to prevent Bradford & Bingley from becoming the next Northern Rock, which ran out of funding and triggered the first bank run in more than a century in September 2007. It had about 113 billion pounds of assets before it borrowed about 24 billion pounds in emergency funds from the Bank of England.

Northern Rock, based in Newcastle, England, was nationalized in February and got an additional 3.4 billion pounds from the government last month after late loan payments rose to 1.2 percent amid the U.K.'s steepest decline in house prices since 1992.

The U.K. avoided nationalization of HBOS Plc, the country's biggest mortgage lender. It waived antitrust restrictions on Sept. 18 to get Lloyds TSB Group, the U.K.'s largest provider of checking accounts, to buy HBOS in a stock swap valued at about 12 billion pounds. HBOS CEO Andy Hornby agreed to sell after concluding the credit crisis ``will be with us for some time.''

Buyers increasingly are waiting as long as they can before agreeing to purchase assets from struggling financial firms.

`Hardball'

Barclays Plc, Britain's third-largest bank, abandoned talks to buy all of Lehman Brothers Holdings Inc. less than 24 hours before the investment bank filed for bankruptcy on Sept. 15. A day later, Barclays agreed to buy parts of its U.S. businesses for $1.75 billion.

Washington Mutual Inc., the 119-year-old Seattle-based bank, became the biggest U.S. lender to fail when it filed for bankruptcy protection Sept. 26. JPMorgan Chase & Co. purchased its branches and assets for $1.9 billion without taking on any of its liabilities.

``Banks have learned to play hardball,'' Potter said. ``They have learned to circle a potential acquisition and return when the value's at its lowest.''

To contact the reporter for this story: Poppy Trowbridge in London at ptrowbridge@bloomberg.net; Ben Livesey in London blivesey@bloomberg.net

Last Updated: September 29, 2008 14:55 EDT