The government is injecting £5bn into Royal Bank of Scotland and also underwriting a £15bn share issue by the bank.
Lloyds TSB and its proposed new partner Halifax Bank of Scotland are also receiving up to £17bn of emergency funding, with the terms of the banks' merger also being reworked.
Under the unprecedented package, the government could theoretically end up owning about 60 per cent of RBS, and 43.5pc of the combined Lloyds TSB-HBOS entity.
Under the deal banks have been ordered to offer competitively-priced lending to homeowners and small businesses.
They will also offer support for schemes to help people struggling with mortgage payments to stay in their homes.
The prime minister said the action the government was taking was `unprecedented but essential'.
"In extraordinary times, with financial markets ceasing to work, the government cannot just leave people on their own to be buffeted about," he said.
"For savers, for small businesses and for homeowners, we must in an uncertain and unstable world, be the rock of stability on which the British people can depend."
Barclays said it was not turning to the government for emergency funding, unveiling instead plans to raise more than £6.5bn from investors to help shore up its balance sheet.
The high street bank also said it will not pay a final dividend for 2008, saving the group £2bn.
HSBC, Britain's other major banking group, has already announced separate capital-raising measures to bolster its operation.
Chancellor Alistair Darling said the government is to appoint three directors to the RBS board and two to Lloyds TSB, but he said the banks would be run `at arm's length' from the government and ministers would not be involved in day-to-day decisions.
He said the government was injecting `very substantial sums' into the banks to stabilise the system.
"It is necessary because we are going through quite extraordinary circumstances the world over," he told GMTV.
"I believe that what we are doing will help - it will go a long, long way to reassuring people.
"There is a lot of turbulence to go through yet, there are a lot of bumps along the way, but I believe that this first step will help in two respects.
"First, it makes our banks strong. Secondly, of course, it is beginning the process of making lending easier."
The government already controls two significant mortgage lenders, Northern Rock and Bradford & Bingley. London's leading share index, which slumped 21pc in its worst week since 1987, rallied today after the rescue package was unveiled.
In early trading Barclays was up 14pc, Lloyds TSB 10pc higher and Royal Bank of Scotland 3pc better off. But HBOS shares moved in the opposite direction, sliding nearly 10pc as investors digested the terms of the reworked merger with Lloyds TSB.
Today's developments come after EU leaders signed up to Gordon Brown's blueprint for recovery.
The announcement, after an emergency summit of Eurozone countries in Paris yesterday, was seen as a significant personal victory for the prime minister.
Opposition from senior figures such as German Chancellor Angela Merkel had earlier stymied joint progress.
But further market dives appeared to focus minds and the group pledged to guarantee lending between banks, and step in with state funding to prevent major financial institutions collapsing.
The US came on board with similar action over the weekend, after Mr Brown and Mr Darling set out their proposals last week.
Mr Brown - who, in a break with precedent, attended the Paris summit despite Britain not being in the single currency - praised the Eurozone measures as the best way of restoring confidence to the shattered international system.
"What is missing is confidence itself," he said.
"I believe that the action we have taken in Britain will restore that, and we will see, over the next few days, worldwide action that will also see confidence restored."
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Showing comments 1 to 24 and replies | View All
Black Flag (13/10/2008 at 13:32)
Absolute idiocy. Trying to force an increase in mortgage lending is irresponsible in the extreme. The reason lending has dried up is because house prices have increased far faster than income levels, driven by cheap, easy credit and are now unaffordably high. They are falling as part of a natural correction. Trying to force people to take on more debt in order to keep the housing market bouyant will just create a bigger problem.
The Council of Mortgage Lenders has issued a press release in response to this announcement which says:
"The CML doubts whether, in the current market where house prices have been falling and demand has reduced, it would be either prudent or desirable for the volume of lending to home-owners to equate to 2007 levels."
Even the people who make money from mortgage lending think lending more money is a bad idea.
Polky (13/10/2008 at 14:01)
or
Banks offered S**ty end of paddle?
:-)
citycentre, manchester (13/10/2008 at 15:03)
thats homeowners as opposed to home buyers
while encouraging more people to borrow is probably a bad idea, forcing banks to offer people who already have loans new deals at rates similar to those they have rather than at highly increased rates might help to
stabilise the situation.
the same goes for small businesses, forcing people out of business or out of their homes will only add to the uncertaintity and lack of confidence
if banks want to charge any rates they like they dont have to accept the taxpayers money, if they do some benefit for taxpayers, in this case in the form of stability of existing debt seems reasonable
Black Flag (13/10/2008 at 15:18)
It will actually make it worse. Banks have been underpricing risk for years, which is a big part of the problem. They have been setting loan rates as if wages and houses prices will always increase smoothly, which is never the case. Loan rates need to increase to cover the risks now, otherwise losses will just keep building up.
"if banks want to charge any rates they like they dont have to accept the taxpayers money, if they do some benefit for taxpayers, in this case in the form of stability of existing debt seems reasonable"
I don't believe taxpayers money should be used in this way, but if it is, the banks should be made to operate in a way that ensures they lend prudently, which means setting loan rates at a level that effectively prices the risk. Keeping credit excessively cheap and funding it with taxpayers' money doesn't do the taxpayer any favours.
Ace Shakespeare , manchester (13/10/2008 at 15:49)
Black Flag (13/10/2008 at 16:04)
Because government involvement in those kind of operations just creates bigger problems. Privatisation of the utilities was one of the best things to happen in post war Britain. It means the person supplying my electricity and gas has to meet my demands, rather than the demands of politicians.
There is a reasonable argument that the National Grid should have been kept in some form of public ownership, but there is no reason that we shouldn't be free to choose who generates our electricity or supplies our gas.
Polky (13/10/2008 at 16:14)
I see a down side.
It's when all the companies you have to choose from (to supply your utilities) decide to join forces and increase prices at the same time so as they keep constant high profits and you get screwed which ever deal you choose.
citycentre, manchester (13/10/2008 at 16:21)
but suddenly increasing it when many people are overstretched already due to rising prices won't help the situation
mass repossesions just leads to homeless families needing to be housed at the taxpayers expense.
the 16 million or so morgatge holders (taxpayes as well mostly) might want soemthing back for the money going to the banks?
Black Flag (13/10/2008 at 16:35)
There have been investigations which have found that there is no cartel behaviour in the UK electricity market. I don't know if any investigation has been carried out in the gas market, but I would expect the result to be the same. Water is a slightly different matter with regard to competition, but that is down to a lack of a competitive market rather than cartel behaviour.
It would be an impractical arrangement to maintain if customers were shopping around to get the best deal. There are too many suppliers to keep an effective arrangement in place and even if they did manage it, if prices were pegged too high, somebody would step into the market, undercut the competition and sweep the cartel's customers away.
Cartels are hard to form without being detected and even harder to maintain.
Plus, you've got the additional problem that, if you are a supplier and you increase the price of your service above the market rate, people will use less of it, so you could potentially end up worse off.
Rt Hon Dr Rev MC Spanner MP QC FCA FRICS JP OK (13/10/2008 at 16:53)
You are completely right. It is lending cheap finance to Americans with no jobs that has started this whole crisis.
Combine that with Pension funds and banks gambling on derivatives and other obscure instruments and governments spending more than they collect in the long term has meant this day has been in the pipe line.
That recklessness has not just been about the banks but has been about people like Clinton and Blair encouraging the banks to support this recklessness.
Brown may think he is the hero of the hour but he is only closing the door long after Black Beauty has bolted from the stable and been hit by a truck.
Black Flag (13/10/2008 at 17:12)
It isn't pleasant, but it's what needs to be done, otherwise banks will keep taking losses and the situation will never stabilise. It's a bit like an insurance company realising it has underestimated the risks it has insured. It has to increase its premiums, or it will inevitably go bust as it soaks up more losses than it can afford.
In the ideal world, the banks' losses would be fall on the people who have invested in them, including the savers who have been profiting from the interest on the loans. Unfortunately, the government has put itself in a position where that can't happen, so it now falls to the taxpayer to bail them out.
Forcing banks to underprice risk will put them in an unsustainable position. The banks which are being backed by the government will end up taking on all the high credit risk, high loan to value mortgages that the other lenders want to off load. The other banks will become more stable as they tidy up and reprice their loan portfolios, but the taxpayer will be left with a large stake in two banks holding junk debt.
Ewan Oosami, Halifax (13/10/2008 at 18:24)
The CEO of RBS is getting the push (not before time) but gets a pension of over £570,000 a year for the rest of his life - jeez I wish I could fail like that. The financial parasites should be locked up and their assets seized.
The good news is that there are 60,000 jobs going to be lost in the financial sector - serves them right!
citycentre, manchester (13/10/2008 at 21:37)
in your downside lies the difference between what happens in a free market ecconimics text book and what happens when real people in the real world get involved
citycentre, manchester (13/10/2008 at 21:46)
its a fair point, but simply increasing interest rates across the board punishes those who have borrowed the most sensibly as they will still be able to pay, just ahve to pay more; those who have over borrowed will default and lose homes or businesses
since tax payers then pay for tempory accomodation for people evicted you get hard working sensible borrowers paying more for their loans, more taxes to support the banks and yet more taxes to support the people who over borrowed and cant pay
if the government is going to own the banks it might as well take a broader view than simply what is best for the bank in the short term
Polky (14/10/2008 at 09:21)
I have my mortgage with the people bank of Northern Rock. If I were to default and have my house repossessed, would it become a council house?
If so, could I rent it back of them for less?
:-)
Black Flag (14/10/2008 at 09:23)
In an effort to keep a doomed house price bubble going for a bit longer, the government will force RBS and Lloyds to mop up the high risk accounts that other lenders price off their books and offer cheap rates to those borrowers. Instead of the industry as a whole stabilsing itself properly, stability will be achieved by the taxpayer picking up the liability for the riskiest bits of lending.
Trying to use more cheap lending as a way to solve a problem driven by cheap lending is like trying to solve an alcoholic's problems by making sure he has a steady supply of drink. It might make him feel better in the short term, but when he does eventually sober up, he'll be in much worse shape.
Black Flag (14/10/2008 at 09:52)
No it wouldn't. Northern Rock is being managed at arms length. If a house were to be reposssessed, it would have to be sold on to clear NR's liabilities. The government couldn't just keep the house while there are still savers to be paid back.
Barney Gumball (14/10/2008 at 15:13)
Esso Blue, Oil incorporated, Luxury Penthouse, Abu Dhabi, Black Gold, Texas Tea. (14/10/2008 at 16:07)
Gordon Brown is my favourite and he may come out of this as one of the best Prime ministers ever, I hope he turns things around, and that people with a mortgage in particular can be favoured.
Rt Hon Dr Rev MC Spanner MP QC FCA FRICS JP OK (14/10/2008 at 17:07)
Mr Brown did not answer how he would solve the problem, merely replying that: “We have been right about the prospects for growth in the British economy, and the hon. Gentleman (Mr. Cable) has been wrong.”
NEVER FORGET WHO CAUSED THE PROBLEMS WE ARE SUFFERING
Esso Blue, Oil incorporated, Luxury Penthouse, Abu Dhabi, Black Gold, Texas Tea. (14/10/2008 at 17:46)
I am changing my name to public enemy No1.
beswick red (15/10/2008 at 00:05)
S P In exile, Tameside (15/10/2008 at 01:07)
citycentre, manchester (15/10/2008 at 17:24)
who caused the problems? possibly people who borrowed too much agaisnt over priced houses
maybe banks to lent too much agaisnt overpriced houses and used over complicated accounting/financial instruments to allow/hide this
which of these is gordon brown?
if you want a government to blame try the one which set provided the legislation for the city "big bang" 1986, or eased consumer credit controls and allowed money to be easily move outside the uk 1980
checking my calender reveals gordon brown was not in government then; however a certain mrs thatcher appears to have been pm
so we know who to blame then