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The Treasury is injecting £20 billion into RBS, giving it a 63-per cent stake in the bank, and pumping a combined £17 billion into Lloyds TSB and HBOS, which have agreed to revise their merger terms.

HBOS is raising £11.5 billion from the Government, and Lloyds TSB an additional £5.5 billion at 173.3p. As a result of the recapitalisation, the Treasury is likely to hold a 43.5 per cent stake in the enlarged bank on the completion of the merger.

Barclays is raising an additional £6.5 billion to bolster its reserves and scrapping its dividend.

The bank said it hopes to raise the money through its investors, not via the Government, although the deal is underwritten by the State, so the Treasury could take a stake if existing investors do not cough up.

In total, including money saved from not paying its dividend and other cost cutting measures, Barclays, hopes to pull together £10 billion to boost its funding. Both RBS and HBoS shares slumped as investors digested the terms of the bailout and Lloyds announced it was rewriting the terms of the merger.

"There is potentially very substantial dilution there," James Hamilton, banks analyst at Numis Securities, said of the rescue deal. "This is the end of chapter 2 of the horror story, but unfortunately chapter 3 – the recession – is on the way."

George Osborne, the Shadow Chancellor, added: "To regard today as a triumph, as some in Government seem to do, is bizarre. And it misjudges the public mood. For this is no triumph. It is a necessary but desperate last-ditch attempt to prevent catastrophe."

Today’s bailout has claimed the scalps of some of the most senior chiefs in the banking sector.

RBS’s chief executive, Sir Fred Goodwin, and its chairman, Sir Tom McKillop, are set to leave the bank. HBOS’s chief executive, Andy Hornby and its chairman, Dennis Stevenson, are also stepping down.

Mr Brown said that he understood Sir Fred would be turning down any severance payment. It had been reported that he was due to receive at least £1.2 million.

It also emerged today that the Financial Services Authority (FSA), the City watchdog, is intervening directly for the first time in how much banks are allowed to pay their staff, in an attempt to crack down on "inappropriate remuneration schemes".

A hard-hitting letter has gone out to the chief executives of all British banks and building societies whose capital requirements are governed by the FSA telling them they will all be visited and asked to explain their pay and bonus structure.

Mr Brown declined to say how the Government would pay for the rescue but said this morning that details on national debt would be revealed in the pre-Budget report.

The deal also obliges the banks to maintain the availability of mortgage lending and loans to small businesses at 2007 levels at least.

Sir Fred, who had led RBS for eight years, will be replaced by British Land's Stephen Hester while Sir Tom will step down as chairman at the bank's AGM next year. RBS said today it will scrap its 2008 bonuses for all board members and pay any future bonuses in shares.

The Government will have the right to agree the appointment of new independent non-executives on the boards of banks who are borrowing money.

The Treasury also announced that banks must commit to helping people struggling with mortgage payments to stay in their homes.

In a statement, the Government said: "The recapitalisations are designed to enable participating banks to achieve prudent but efficient capital structures.

"The Government intends to create a new arms length body to manage the Government's shareholdings in recapitalised institutions on a professional and wholly commercial basis, and seek to effectively realise value to the taxpayer."

As part of the cash injection, RBS has agreed to maintain its mortgage lending and lending to small businesses "at least" at 2007 levels – a condition stipulated by the Government to all banks taking part in the scheme. In addition, Johnny Cameron, the chairman of RBS’s global markets division, will step down from the board.

Sir Tom said: "The steps we have announced today, taken in conjunction with the Government, secure a stronger future for the RBS Group. We regret having to raise new capital but believe that decisive action is necessary in this unprecedented market environment".

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