Two of Britain's biggest high street banks will in effect be nationalised today in a dramatic move by the Government that follows a day of international negotiations aimed at co-ordinating a pan-European approach to the global financial crisis.
The development, where the state will take a majority shareholding in Royal Bank of Scotland (RBS) and a large share of Halifax Bank of Scotland (HBOS), emerged as European leaders appeared ready to follow the UK-led strategy of bailing out ailing banks by using public funds to take large stakes in them.
Gordon Brown discussed the rapidly evolving situation with the French President, Nicolas Sarkozy, yesterday, ahead of the meeting of eurozone leaders in Paris. Last night, that looked to have set the Continent on the same course as the UK.
But it is in London this morning that the Government will announce that it will inject about £32bn into RBS and HBOS. The Government may take seats on the two banks' boards in return for its support. Up to £17bn of taxpayers' money will be injected into Lloyds TSB and Barclays. The move called into question the proposed Lloyds TSBtakeover of HBOS that just days ago was being backed by the Government, with the deal now certain to be renegotiated to survive. Ministers hope the moves will restore some calm to the markets: Britain's blue-chip companies lost tens of billions of pounds in value last week after catastrophic falls on the London stock exchange.
The Prime Minister predicted yesterday that financial confidence would pick up at home and abroad. "The difficulty that we have got at the moment is in restoring confidence in the banking system," he said. "What is missing is confidence itself. I believe 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."
Mr Brown was speaking after the meeting of European leaders in Paris, which ended with agreement on a UK-style bailout of their banks, as well as sweeteners to get banks lending to each other again. Leaders of the 15 eurozone countries – joined by Mr Brown – shook off the quarrels of the past 10 days and adopted a co-ordinated plan to guarantee all bank-to-bank loans for five years. European governments would also be encouraged, where necessary, to take large stakes in struggling banks.
Mr Brown added that last night's meeting at the Élysée Palace was an "important moment for the world economy". He said: "Decisions that we make in the next few days are decisions that will affect us for many years ahead." Although Mr Brown declined to take the credit directly, French and European officials said that the European Union strategy was largely inspired by the "radical" proposals adopted in London on Tuesday.
There will be no single EU-funded rescue package but there would be what the German leader, Angela Merkel, described as a "tool box" of measures which can be adopted at national level without shifting the financial pain from one EU country to another.
Alistair Darling, the Chancellor of the Exchequer, meanwhile, returned early from talks in Washington with finance ministers from the Group of Seven leading industrialised nations to direct the negotiations in the Treasury, which continued into the small hours today.
At the meeting in Washington, the managing director of the IMF, Dominique Strauss-Kahn, warned that more countries could follow Iceland into virtual national bankruptcy. Mr Strauss-Kahn said the Baltic republics of Estonia, Latvia and Lithuania were especially at risk.
Mr Darling is preparing to announce the latest upheaval to Britain's banking system in a joint press conference this morning with the Prime Minister. The state will take a majority shareholding in RBS in return for handing up to £20bn to the bank, adding to a record £12bn raised from shareholders in June. The bank will be expected to agree controls on the remuneration paid to its top staff. Sir Fred Goodwin, its chief executive, will be an early casualty of the takeover. Shareholders would probably have demanded his head, but the Government is also keen for Sir Fred to move on.
The Treasury will also pump about £12bn into HBOS, where it may also require a board seat. It is expected to make similar stipulations over executive pay. Barclays was last night resisting pressure to raise up to £10bn in favour of a smaller sum and Lloyds TSB will look to get £7bn, bringing the potential bill for the rescue operation to nearly £50bn.
Massive share price falls in RBS and HBOS, frozen money markets and panic about the financial crisis spreading to the wider economy drove the Government to push the banks into raising more money, and faster.
The Government will agree to buy a combination of ordinary shares and preference shares, which pay interest and rank above ordinary shares for repayment, in the four banks. Shareholders will be given the chance to buy the shares first, with the Government mopping up the unwanted stock. The low takeup of share issues by ordinary shareholders of HBOS earlier this year indicates that the Government will be left with big stakes.