Compared with this, Northern Rock was a sideshow. It now looks inevitable that the British taxpayer will soon own a majority stake in Royal Bank of Scotland, which has liabilities of £2,000 billion, almost 20 times more than Northern Rock. The Government may also take a controlling stake in HBOS if the Lloyds TSB takeover falls through.

This was not the outcome the Government intended when it announced its plan for the banks last week. To bolster confidence in the banking system, it told the top banks to boost the amount of capital they held.

For some, such as RBS, that would require raising a huge amount of money. It was hoped that this would come partly from its shareholders, with the Government chipping in more in return for so-called preference shares. But last week’s stock market rout put an end to that idea. RBS’s share price has now fallen so far and investors’ confidence is so shaken that the bulk of the money will have to come from the Government.

And rather than preference shares the injection will be largely in the form of ordinary shares with voting rights. The authorities also decided to increase the total amount of new capital that would be raised, to provide a further cushion for future losses.

As a result, RBS is now looking to raise £20 billion, which is almost twice its stock market value. The fund-raising will leave the Government owning an estimated 60 per cent of its ordinary shares.

This will, at least, make it clear who is in charge. The Government will control the company through its shareholding and have directors on the board. It will still be run on a day-to-day basis by its senior management, headed by Stephen Hester, who is replacing Sir Fred Goodwin as chief executive. But the Government will call the shots. It will be able to influence pay and dividend policy and to ensure that the banks maintains its lending.

The announcement of the Government’s plan last week was acclaimed widely and is now being followed by many countries. But it failed to have any immediate impact on confidence. One of its key objectives was to get banks to start lending to each other again. The drying up of this “interbank” lending market has been one of the most worrying aspects of the credit crunch. But the interest rates at which banks lend to each other for all but the shortest period actually went up at the end of last week.

The Government is expected to announce tomorrow that it will guarantee lending between banks, which should help to revive the market. Moves by other countries are also considered critical to reviving interbank lending, which is a truly global market.

Yet after the worst week in the stock market for 20 years, more falls in the next few days are feared, which could undermine confidence in the banking system further. The Japanese stock market is shut today so the reaction of London share trading to the government moves could set the tone for the week. Traders will also be watching for the unemployment figures on Wednesday, which are expected to show rising job losses as the credit crisis starts to bite in the real economy.

As the global financial system has approached the brink of disaster in recent weeks, the markets have been gripped with a new fear. Even if the financial system is stabilised it may be too late to prevent a severe and perhaps prolonged global economic downturn.

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