The two banks plan to raise an extra £17 billion to boost their balance sheets and are appealing to existing shareholders for a total of £13 billion.

If - as seems likely - investors snub the new shares, the Treasury will take them up, leaving it with a potential stake of up to 43.5% in the new business.

Lloyds TSB and HBOS have renegotiated the terms of the takeover in the light of the mammoth capital-raising exercise, with Lloyds paying just 0.605 of its shares for every HBOS one. This values HBOS at around £6.9 billion.

HBOS investors will own just a fifth of the overall group, with Lloyds TSB shareholders potentially holding little more than a third, or 36.5%.

News of the taxpayer's potential large exposure to the struggling banking sector came as HBOS - the UK's biggest mortgage lender - chose this morning to issue a profits warning.

HBOS said market conditions had "deteriorated significantly" since the end of June as house price falls gather pace.

"Underlying profitability is therefore now being impacted by a significant deterioration in credit conditions and falling property prices with associated increased provisioning in both the retail and corporate businesses," it said.

HBOS also warned of a further round of write-downs on investments hit by the credit crunch as well as higher funding costs.

"HBOS now expects these factors to impact substantially on the management's expectations of the underlying results for 2008," it warned.]


WHO'S SHOULDERING THE RISK IN BANK BAIL-OUT

The Government's £500 billion bank bail-out package raised fears that taxpayers' money could be put at risk.

But the Treasury will not have to cough up the full amount. The immediate funds being made available amount to £50 billion - for banks to strengthen their finances.

And today the indications were that Royal Bank of Scotland, HBOS, Lloyds TSB and Barclays would dip into the pot.

The original plan involved the Government taking preference shares in the companies, which would pay a dividend.

But the proposals will now also see ordinary shares offered to investors.

Any shares taken by the Government will be placed in a newly created bank reconstruction fund that will hold the stock until market conditions improve.

What about the rest of the money?

Chancellor Alistair Darling also said the Treasury will provide - for a fee - guarantees of around £250 billion on loans between banks, which it hopes will ease the pressure in frozen money markets.

And the Government expanded the size of its Special Liquidity Scheme - which allow banks to swap risky assets for safer Treasury bonds - to £200 billion and is accepting a wider range of collateral in its funding auctions.

How much taxpayers' money is really at risk?

At least £50 billion - from spending money on stakes in UK banks - although the Government could eventually make a profit on this if markets recover.

This works out at £820 for every man, woman and child in the UK.
Guarantees over inter-bank lending are potentially a much bigger exposure.

But the taxpayer will not be at risk unless banks default on lending.
The risk from the £200 billion Special Liquidity Scheme is low. Banks which borrow short-term Treasury bills have to deposit a greater value of long-term assets.

The hope is that with the taxpayer providing back up, the banks will be safe and avoid the nightmare scenario of a massive collapse.

Will there be an impact on the public finances?

The Government has three principal means of financing the bail-out package - issuing bonds, increasing taxes or cutting public spending.

If the £50 billion injection is financed with public borrowing, some experts have warned that this would take the UK's net borrowing requirement well above 100 billion this year - almost three times official estimates.

This will deal a further blow to finances reeling from an economic slowdown and increase the chances of tax rises and spending cuts.

Why don't the Government guarantee all personal savings in case the banks collapse?

Because it shifts liability from the banks to the taxpayers. And we are talking about a lot of money. Estimates suggest it would mean a risk running into trillions of pounds - that is £1,000,000,000,000s. This would place a huge burden on public finances.

And it could be the "thin end of the wedge", some fear. Bank's business customers may be next in asking for their money to be covered.

A 100% guarantee could also impact on the Government's ability to raise funds which in turn could hit public spending. The theory has it that with a promise to protect all savings, people would be less willing to buy into secure state-backed bonds.

The main attraction of Government "gilt-edged" bonds is that they are seen as one of the safest places you can put money.

If bank saving accounts are covered by a Government guarantee this will no longer be the case. As such they would be deemed to be less attractive, especially as they currently offer a return which is less than that of a top savings account.