Royal Bank of Scotland (RBS) and Lloyds have both agreed to defer bonuses in return for an additional £40 billion of taxpayers' money as part of a deal with the Government that will break up two of Britain's biggest lenders.

In return for receiving billions of pounds more of taxpayers' money, the Treasury said, both banks will not pay cash bonuses for 2009 to any staff earning more than £39,000 a year while the board of each lender will defer bonuses due for this year until 2012.

Stephen Hester, the chief executive of RBS, who took over the role from his disgraced predecessor, Sir Fred Goodwin, said today: “That does mean we will be making extensive use of deferred payments and payments in shares.

“We are aware that we need public support, given our position. However, the surest way for the taxpayer to see value for its support is if RBS is able to have very good people and compete in its markets. We must be competitive or we will not return value to the taxpayer."

RBS is also being forced to dispose of more businesses than it expected, including its insurance arm, which includes the Churchill and Direct Line brands, with £11.5 billion of assets. Shares in RBS fell 4.1 per cent to 37.2p in early trading.

Mr Hester said: "We are here by courtesy of the British taxpayer, so I am not going to cavil or carp in any way. But we do feel bruised. We do feel that life has in many ways been made more difficult for us. However, we have a job to do and we will get on with doing it."

Lloyds said that the majority of its 120,000 staff earned well below the £39,000 threshold and their bonsuses averaged less than £1,000 each.

In addition to the £20 billion bailout that RBS has already received from the Government, the state will inject a further £25.5 billion into the lender, which will take the taxpayers' stake in the bank from 72 per cent to 84 per cent. The Government will also provide an extra £8 billion in contingency funding. Unlike Lloyds, RBS has also elected to take part in the Government's Asset Protection Scheme (APS), which provides state insurance against toxic debt. RBS will place £282 billion worth of bad loans into the scheme, far below the £325 billion it initially expected to have to insure.

Lloyds Banking Group, which, at the instigation of Gordon Brown, rescued HBOS at the height of the banking crisis, will receive an additional £5.7 billion from the Government on top of the £17 billion bailout funding already pumped into the lender.

It also confirmed plans to launch a £13.5 billion rights issue as part of a £21 billion fundraising plan to avoid taking part in the Government’s APS, which would have increased the state's 43 per cent holding in the bank.

Lloyds said that it will set the price for the rights issue before its general meeting on November 26, but it is thought the bank will offer the shares at a substantial discount to today’s price of 88.5p, up 4.24 per cent in early trading.

Lloyds will pay a £2.5 billion penalty for not taking part in the APS and will raise additional funds by swapping £7.5 billion in existing debt into contingent capital.

RBS’s fee for joining the APS has been reduced from an upfront £6.5 billion payment to £700 million a year for three years and £500 million thereafter, a reduction of £2.5 billion. However, the amount it will bear for any first losses has been raised from £42 billion to £60 billion.

The Treasury admitted today that Alistair Darling will have to add about an extra £13 billion to the government cash spending requirement that was declared in the Budget earlier this year, to fund the purchase of shares in both banks.

As part of an agreement with the European Commission, which is demanding that RBS sell assets in return for the billions of pounds of state aid that it has received, the bank will dispose of its branch network in England and Wales as well as its NatWest sites in Scotland.

In addition to divesting its insurance division, RBS will dispose of its global merchant services business and RBS Sempra Commodities.

Lloyds Banking Group will sell its Lloyds branches in Scotland, its Cheltenham & Gloucester sites, and the Intelligent Finance online business.

Mr Darling said today the break-up will introduce more competition on the high street for customers.

He said: “At the moment we really have about half a dozen large banks providing banking services in this country. Yes, there’s lots of building societies, but the market is dominated by them.”

He said: “I would like to see perhaps three new entrants to the high street."

Mr Darling also said RBS was "utterly bust” a year ago, adding: "If we hadn’t done anything it would’ve collapsed - everything would’ve gone.”

Commenting on today's agreement, Mr Hester said: "I believe today marks a key milestone in the radical restructuring we are undertaking to bring RBS back to standalone strength.

"While we have a great deal to do to deliver on our strategic plan, I believe that we now have the clarity that will allow us to move forward and we will do that with both strong resolve and confidence."

Yesterday, RBS announced that it would shed a further 3,700 jobs on top of the 16,000 cuts already announced.

To prepare the way for its £13.5 billion rights issue, Lloyds revealed that trading had continued to improve in the third quarter of this year.

It said that its net interest margin — a key measure of profitability — was flat compared with the first half of the year in a sign that the market was stabilising.

Costs were 2 per cent lower than a year ago and the rate at which it is having to write off bad loans was also falling, with impairment losses totalling £5.2 billion in the third quarter, down from £13.4 billion in the first half.

Eric Daniels, chief executive of Lloyds, said that there would be a "significant reduction" in impairments in the second half of the year, and that 2010's impairment charges would be even lower. However, Mr Daniels stuck to his forecast that the bank would make a loss before tax for this year.

Customer deposits rose from £370 billion to £373 billion in the quarter, while lending to customers dropped from £653 billion to £649 billion.

Times Recommends

• Toyota recalls 437,000 cars including Lexus
• Myners says bonuses are bleeding pension funds
• Japanese company faked safety reports on seats