Now we all own part of Scotland’s big banks

The UK Government’s £37billion gamble to end the turmoil in the country’s banking sector began to pay off immediately yesterday as the top share index roared back from last week’s crash.

But there are fears that the financial lifeline thrown to three of the UK’s biggest banks could lead to sharp tax rises and spending cuts.

Taxpayers will take “significant” stakes in Royal Bank of Scotland, Halifax Bank of Scotland and Lloyds TSB.

But the investment will come with strings attached, including curbs on bosses’ bonuses and a pledge to ensure the availability and supply of loans to small businesses and homeowners.

Under the plan, £5billion will be injected into Royal Bank of Scotland by the Treasury, with a £15billion share issue by the bank also guaranteed by the government.

Lloyds TSB and its proposed new partner HBOS will receive up to £17billion of emergency funding, while the price Lloyds TSB is paying for its rival is being lowered.

The bailout boosted confidence in London shares, with the FTSE 100 index closing more than 8% higher.

But it claimed the UK’s first major scalps of the banking crisis, with the chairmen and chief executives of RBS and HBOS standing down.

Prime Minister Gordon Brown said the bailout was “unprecedented but essential for all of us”.

But Conservative leader David Cameron said it was “painful and expensive” and represented “the day that the bills came in for a decade of too much borrowing”.

He added: “It’s not a day to be triumphant, not a day for celebration.”

Under the deal, the government could theoretically end up owning about 60% of RBS and 43% of the combined Lloyds TSB-HBOS entity, depending on how many other investors choose to buy the banks’ new shares.

Privately, ministers accept they will own “significant” stakes in the banks, helping to control remuneration and dividend policy until the investments are sold.

The banks will stop paying dividends to shareholders until they are in a position to pay back the government.

Although the Footsie rose after the deal was announced, shares in the three banks fell heavily, reflecting the fact that existing investors will see their holdings diluted and dividends curbed.

HBOS dived 28%, Lloyds 14% and RBS 8%.

RBS chief executive Sir Fred Goodwin – who earned £4.2million last year and asked shareholders for £12billion in April to shore up the group’s balance sheet – is being replaced immediately, and chairman Sir Tom McKillop stands down next April.

HBOS chief executive Andy Hornby and chairman Dennis Stevenson are also to step aside when the bank is taken over by Lloyds TSB.

Chancellor Alistair Darling said the men had waived their contractual entitlements, estimated at £2million for Sir Fred and nearly £1million for Mr Hornby.

“I think they have decided to do the right thing there,” Mr Darling said.

Lloyds TSB is raising £5.5billion of new capital, with HBOS opting for an extra £11.5billion. Under the reworked takeover deal, HBOS shareholders will receive 0.605 Lloyds TSB shares for every HBOS share, valuing HBOS at around £6.9billion. Previously, Lloyds TSB was offering 0.83 shares.

Barclays said it was not turning to the government for emergency funding, and instead announced plans to raise more than £6.5billion from investors to help shore up its balance sheet.

The high street bank also said it would not pay a final dividend for 2008, saving the group £2billion.

Barclays chief executive John Varley said that banks in need of government capital injections would be “constrained in their strategic and operational flexibility”.

He suggested Barclays could benefit as bankers quit rivals in the face of government supervision. Barclays’ shares rose 5% yesterday.

HSBC, the UK’s other major banking group, has already announced separate capital-raising measures to bolster its UK operation. Its shares firmed 6% yesterday.

The Treasury is to set up a new company to run the interests in RBS, Lloyds TSB and HBOS “at arm’s length” from the government, with ministers not involved in day-to-day decisions. But the government is to appoint three directors to the RBS board and two to Lloyds TSB.

Scotland Secretary Jim Murphy said Mr Darling’s “decisive action” was “exactly what was needed to restore trust and confidence in the banking system”.

He said: “The chancellor's bold course of action has given the British people certainty in the face of the turmoil which has affected financial systems across the globe.”

Sir Fred, who has led RBS for nine years, is to be replaced after a “short” handover period by Stephen Hester, currently chief executive of British Land.

Chairman Sir Tom said there had been no government pressure for Sir Fred to stand down. He insisted: “The board believed it was the right point in time for a change in leadership.”

Sir Tom said he is expecting “significant” interest in RBS new shares among investors.