Doubt hits HBOS/Loyds TSB deal | Sir Fred Goodwin faces the axe | Cost of rescue plan keeps rising | Banks ask for more money | Europe follows Brown | Comment: Anatole Kaletsky | Food stamps for low income US | Baugur seeks help from Sir Philip Green | Morgan Stanley terms rewrite | Economic View: Gary Duncan

The Chancellor will move to take control of the Royal Bank of Scotland today by injecting £20 billion of taxpayers’ money.

The Government is also expected to take over HBOS in the most dramatic extension of state ownership in the British economy since the war. The bank’s rescue takeover by Lloyds TSB appeared to be on the brink of collapse last night.

As governments around the world scramble to prevent the collapse of the global financial system, Alistair Darling will unveil plans for a £40 billion “recapitalisation” of the banking sector.

The announcement, expected to be made before the London Stock Exchange opens this morning, could involve the taxpayer taking big stakes in other banks including Lloyds TSB and Barclays, if investors do not answer the call to buy shares.

The Chancellor will also offer government guarantees on interbank lending, a key part of the financial system that has virtually dried up.The scale of the nationalisations dwarfs the rescues of Northern Rock and Bradford & Bingley and represents a potentially huge risk for the taxpayer. In return, the Government will insist on putting its own representatives on the banks’ boards and require them to reopen lending to small businesses and restrain bonus payments.

Sir Fred Goodwin is expected to step down today as chief executive of the Royal Bank of Scotland (RBS). Andy Hornby, the chief executive of HBOS, also faces an uncertain future.

RBS will offer its shareholders the right to buy £15 billion of new shares, the vast majority of which are expected to be left with the Government, giving it a 60 per cent stake.

Ministers denied last night that there was any plan to nationalise the whole banking sector and said that the aim was to restore the banks to full private ownership as soon as was sensible.

As Britain took the lead in shoring up its banking systems, other European countries announced similar rescue packages in a co-ordinated move to stem global financial turmoil.

The Government was forced to take bigger stakes in the banks than it originally intended because of a dramatic slump in banks’ share prices last week. It also increased the amount of money it demanded the banks raise in an attempt to rebuild shattered confidence in the financial system.

RBS and HBOS are expected to lead the way with proposals involving the issue of ordinary shares, underwritten by the Government. Existing investors will be able to buy the new shares but the Government will step in and buy them if the appetite is weak.

RBS wants the Government to underwrite a £15 billion-plus cash call to investors, while HBOS is requesting up to £12 billion. RBS is looking to raise a further £5 billion by issuing preference shares that do not carry voting rights. If the Lloyds TSB takeover does not happen, the sum required by HBOS would mean something close to a majority stake for the taxpayer there as well.

RBS was valued at £11.8 billion at the close of play on Friday. The original plan by the Government involved taking preference shares in companies, which would pay a dividend and mean a potential profit for taxpayers. However, the proposals will now also mean ordinary shares being offered to investors, ensuring the banks get the cash they want.

Any shares taken by the Government will be placed in a newly created bank reconstruction fund that would hold the stock until market conditions improve. Ordinary shares give ministers voting rights and senior figures representing the Government will go on the boards.

The proposals come less than a week after the Government unveiled a £500 billion package aimed at recapitalising the banks and encouraging firms to lend to each other again.

The talks have been accelerated after heavy falls on world markets last week, including a 61 per cent drop in the value of RBS.

Mervyn King, the Bank of England Governor, has reportedly told the banks to ask for more than they need, meaning their capital position would be strengthened sufficiently to absorb shocks and a long recession.

Lloyds TSB has been reported as requiring £7 billion and Barclays £3 billion but it is understood that Barclays is under pressure from the Government to raise up to double that.

The positions of Sir Fred and Sir Tom McKillop, the RBS chairman, have been under scrutiny since the group was forced to raise £12 billion from investors earlier this year. RBS has also written off nearly £6 billion from credit crunch-linked investments this year, making it one of Britain’s worst-affected banks by the sub-prime loans crisis.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive