Treasury gives £37bn to save banks

The government is to invest £37 billion in Royal Bank of Scotland (RBS), HBOS and Lloyds TSB in an unprecedented move.

RBS will take a total of £20 billion - £15 billion in ordinary shares at a 8.5 per cent discount on the Friday closing price and £5 billion in preference shares. The RBS chief executive Sir Fred Goodwin is to resign.

HBOS will take £11.5 billion and Lloyds TSB will take £5.5 billion.

The City has responded with the FTSE 100 jumping 5.17 per cent at 8:11 BST.

The government will be the biggest shareholder in the RBS and HBOS - with a 63 per cent stake in RBS.

The combined Lloyds TSB/HBOS firm – after the merger deal is completed - will have a government stake of a 43 per cent, although the details of the merger will be renegotiated.

The boards of Lloyds TSB and HBOS have both agreed to proceed with a recommended offer on revised terms - given "the current market environment and the future prospects of the enlarged group".

Sir Victor Blank, chairman of Lloyds TSB, said: "Today's news is good for investors and customers alike. Lloyds TSB's already robust financial position is further enhanced by today's capital raising which in turn allows us to drive forward with our plans to acquire HBOS.

"Our customers can feel confident that their money is secure. Lloyds TSB is and remains a great place to bank."

Sir Tom McKillop, chairman of RBS, said: "The steps we have announced today, taken in conjunction with the government, will secure a stronger future for the RBS Group. We regret having to raise new capital but believe that decisive action is necessary in this unprecedented market environment."

As a part of the deal, the banks were forced to maintain until 2011 the availability of competitively-priced lending to homeowners and to small businesses at 2007 levels.

Senior executive bonuses will be under control and the government has the right to appointment non-executive directors.

A Treasury statement read: "The overall aim of these measures is to support stability in the financial system; to protect ordinary savers, depositors, businesses and borrowers; and to safeguard the interests of the taxpayer."

Barclays has stated it will raise the necessary cash to reach the right capital level demanded by the Treasury from investors without calling on government funding.

By the end of the year, the firm will raise around £3 billion through issuing preference shares.