Alistair Darling is to offer guarantees worth £600 billion against toxic assets to give two of Britain’s biggest but ailing banks a final chance to survive the credit crunch.

The colossal figure is even bigger than expected and exposes taxpayers to unprecedented liabilities from bad debts that are unlikely ever to be repaid.

Treasury ministers were locked in frantic negotiations with Royal Bank of Scotland and Lloyds late last night to enable the Chancellor to announce this morning that he is insuring more than £300 billion of RBS’s toxic assets.Tomorrow he will say that the Government is insuring between £250 billion and £300 billion of toxic investments held by Lloyds Banking Group.

In return the two banks — in which the taxpayer has already taken a £37 billion stake — will provide extra loans to homebuyers and business worth a combined £40 billion.

The two announcements are timed to coincide with RBS’s confirmation today that it lost £8 billion last year, and Lloyds’s tomorrow that its new HBOS subsidiary lost £10 billion.

In the latest sign of its deep financial woes, RBS announced yesterday that it was ending its sponsorship of the Williams Formula One team as part of a move to cut funding of British sport by 50 per cent by 2010.

The overall figure to be insured is even bigger than expected after the Government insisted that the pool of toxic assets to be isolated should be large enough to give the banks the confidence and stability to restructure and become better organisations.

“We told them it would be erring on the side of caution to go for a higher figure. We do not want them coming back for more,” a source close to the negotiations told The Times last night.

Mr Darling is gambling that the figures eventually agreed will be enough to set the banks on the road to recovery, and ultimately to the private sector, and end talk of them being fully nationalised.

But with only hours to go before this morning’s Stock Exchange announcement several issues remained to be worked out by the Treasury team led by Lord Myners, the City minister, Baroness Vadera, a Business minister, and Tom Scholar, a senior Treasury official in charge of financial stability. “We are ready for this to go into the early hours if necessary,” a senior figure said.

The deal does not involve Barclays, although there is strong speculation that it is waiting on the terms agreed with RBS and Lloyds before deciding whether to participate in the asset protection scheme.

Mr Darling will emphasise today how he intends to protect the interests of taxpayers. As The Times disclosed yesterday there has been a long argument over the scale of the “first loss” that the banks must be prepared to bear on the insured assets before the Government starts meeting the costs.

There has also been argument over the size of the fee to be charged for the scheme, which is likely to be recouped through convertible preference shares rather than cash. The fee is expected to be more than 3 per cent.

Sources suggested last night that the commitments for new lending to be made by the banks in return for the guarantees would be legally binding.

Today’s moves come after the chairman of the Financial Service Authority blamed “political factors” for its failure to spot danger in the financial system. The comments by Lord Turner of Ecchinswell are likely to be seen as pointing the finger at Mr Brown, who as Chancellor was responsible for setting up the regulatory system.

Giving evidence to the Treasury Committee, the peer said that scrutiny of institutions such as Northern Rock, HBOS and RBS were affected by “philosophy”. He said: “They existed within a political philosophy where all the pressure on the FSA was not to say, ‘Why aren’t you looking at these business models?’, but, ‘Why are you being so heavy and intrusive? Can’t you make your regulation a bit more light-touch?’.

“We were supervising people like HBOS within a particular philosophy of the way you do regulation, which I think in retrospect was wrong.

“I think [the FSA's actions were] a competent execution of a style of regulation and a philosophy in regulation which was, in retrospect, mistaken.”

Pressed on what created that philosophy, Lord Turner replied: “Political assumptions at the time.” But he added that the preference for light-touch regulation “existed in speeches on both sides of the House”.

The FSA signalled a massive reform of the way in which it polices the City, Lord Turner said that it wanted to be able to regulate the financial products, including mortgages, sold by banks as well as the institutions themselves. He saw “considerable merit” in ending 100 per cent mortgages and suggested going further and reviewing loans of up to 80 per cent of a property’s value.

RBS’s partnership with the Williams team, which began in 2005, will end with the current contract after the 2010 season. The news is a blow to Williams, one of the few independent teams in Formula One. The bank also plans to review its sponsorship deals with individuals such as the tennis player Andy Murray. Andrew McLaughlin, the RBS group director, said: “We have been reviewing all of our activities since October.”

RBS will announce further restructuring moves today.

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