£50bn bailout to save Britain's banks (but will it be enough to save us?)

A £50 billion lifeline is set to be thrown to Britain's beleaguered banks today. Ministers will announce that the Treasury is spending the money to buy huge stakes in the lenders, which suffered further dramatic collapses in their share prices yesterday.

The plan was hammered out last night in emergency talks chaired by Gordon Brown at No 10 as the crisis intensified. Mr Brown, together with the Chancellor, Alistair Darling, and the Bank of England Governor, Mervyn King, were expected to confirm the bailout before the markets opened this morning, with Treasury officials preparing to work through the night on the detail of the proposals. Under the "recapitalisation" deal – which Mr Brown described yesterday as "the stability and restructuring plan" – up to £50bn of taxpayers' money would be pumped into troubled financial institutions in an effort to build up their capital and encourage them to lend again. In return, the state would be given preferential shares in the banks, which could be cashed in by the Treasury once their value recovers.

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Mr Darling flew back early from a meeting of European finance ministers for talks with Lord Turner of Ecchinswell, the chairman of the Financial Services Authority, which is closely involved in the deal. The original intention was to set out the plans by the weekend but the share collapse forced Mr Darling to rush the announcement forward. Royal Bank of Scotland's stock fell by 39 per cent yesterday, Halifax Bank of Scotland was down 41 per cent and Lloyds fell 13 per cent.

Shares in the once mighty RBS, owner of NatWest, and HBOS, the country's biggest mortgage lender, both fell to all-time lows of less than £1 yesterday. RBS's plunge raised fears that the bank could suffer the same fate as HBOS, which nearly imploded before its rescue takeover by LloydsTSB was agreed last month. The fall in HBOS shares increased doubts about whether the Lloyds merger would go through, because HBOS shares were so far below the offer price of about 189p.

The banks agreed to the deal last night, with even those that believed they were financially sound accepting it was a price worth paying if Government support helped to shore up confidence in the banking sector.

After the Downing Street summit, Mr Darling confirmed he would make an announcement in the morning. He said: "The Bank of England has been putting substantial sums into the market today and it is ready to do more when that is needed. We have been working closely with the Governor, the Financial Services Authority and financial institutions to put banks on a longer-term, sound footing."

Treasury officials angrily accused the banks of leaking details of the recapitalisation after an earlier, private meeting between Mr Darling and senior bank executives. The banks blamed the Treasury for the leak – a charge denied by Whitehall sources. A Downing Street spokesman said the purpose of last night's meeting was to "consider further the Government's proposals for ongoing action we are taking to stabilise the financial system and our proposals for longer-term reform".

The talks came amid accusations that the Government was failing to get a grip on the crisis, which has seen bank shares plummet and tens of billions of pounds wiped off the value of blue-chip companies. Critics say ministers' silence over the freefall has exacerbated the problems. The Treasury said it would be irresponsible to make premature announcements before the detail was hammered out, while No 10 said policies had to be set out in a "calm and orderly manner".

Vince Cable, the Liberal Democrat Treasury spokesman, who backs the recapitalisation, said: "We are dealing with an emergency problem here. It is the only way these banks are going to be able to survive the storm. There is a lot of talk about this happening and I fear this is actually contributing to a climate of uncertainty."

In a lecture at the Cass Business School in London tonight, Mr Darling is expected to say that the Government's golden rule – the ban on borrowing to fund current spending – is being suspended. Such a move would acknowledge that the collapse in government income caused by the economic downturn is putting huge pressure on Labour's spending plans.

Yesterday, the British Chambers of Commerce claimed the country was already in recession – an analysis shared by some Whitehall officials, who point out that France and Germany have already experienced negative growth. The BCC's findings were also backed up by the latest economic data, which showed factory output falling at its fastest rate since 1980.

There is some division over whether the Government's £50bn handout is enough to solve the banking crisis. The International Monetary Fund called yesterday for radical policy steps to stop the credit crunch from causing a global economic slowdown, but said more co-ordinated action was needed. One option, for example, is for the big central banks to cut interest rates simultaneously, as they did after the US terror attacks on 11 September 2001. The Bank of England will unveil its latest interest rates tomorrow.

The Government plan: What it means for banks

What is being planned?

The UK authorities have so far taken a piecemeal approach to dealing with the financial crisis, but with shares in most banks falling and those of Royal Bank of Scotland and HBOS plummeting, something more dramatic had to be done. The Government will now put money into those domestic banks that have run down their reserves in an attempt to shore up confidence once and for all.

What does a capital injection mean?

Banks hold capital reserves, consisting of cash and debt, to soak up losses from bad debts. They were allowed to reduce these buffers in the boom years but now investors want to see they have more.

Didn't the banks raise billions early this year from shareholders?

Yes, but the financial turmoil has increased since the bankruptcy of Lehman Brothers in the US. If other financial institutions refuse to lend the banks money, they will implode.

How much will it cost?

About £25bn ought to do it for starters, with the same sum available if losses from bad debts increase.

The Government will probably swapits cash for preference shares, which rank above ordinary shares and are paid a rate of interest rather than a share of earnings.

What does this mean for shareholders?

Technically, the presence of such preference shares should not affect how much ordinary shares are worth, although they do earn a dividend. But the Government will probably insist that all dividends are suspended.

Can the Government just do this?

Yes. Measures introduced when Northern Rock was nationalised allow it to take stakes in banks when it chooses to do so.

What about government finances?

It all depends on how they do it, but with opposition parties falling into line it appears that no one really seems to care any more.

Sean Farrell