In a dramatic deal aimed at finally easing the crisis in the financial system the Treasury will pump up to £17bn of taxpayers' cash into Halifax Bank of Scotland (HBOS) and Lloyds TSB if their proposed merger goes ahead, while the Government could become the majority shareholder in Royal Bank of Scotland.

It was also confirmed that Lloyds TSB has renegotiated the price it is willing to pay for HBOS after seeing billions of pounds wiped off the bank's value last week.

The chairmen and chief executives of both HBOS and RBS are to go in the wake of the part-nationalisation scheme.

After watching stock markets and confidence plummet last week, Gordon Brown and Chancellor Alistair Darling revealed the details of their rescue plan yesterday but said there were conditions attached – not least a ban on bonuses this year, in the face of a public backlash over boardroom fat-cat pay packets. Last year, the board of HBOS pocketed £3.3m in bonuses.

The banks will also have to offer more mortgages and loans for small businesses as part of the deal to kick-start lending, while the Government will appoint board members over the coming days.

Despite the Treasury injection the banks' shares continued to plummet yesterday, although the FTSE 100 bounced back to rise by eight per cent.

Yesterday's announcement came after a weekend of frantic negotiations between Treasury officials and the banks. It forms one part of the £500bn rescue plan outlined last week and was described by Mr Brown as "unprecedented but essential for all of us".

The Government will take a mixture of ordinary and preference shares in the banks. Mr Darling insisted the Treasury hoped to profit in the future when shares could be sold. Banks will stop paying dividends to shareholders until they are in a position to pay back the Government.

An initial £5bn will be injected into Royal Bank of Scotland, but with a £15bn share issue by the bank also guaranteed by the Treasury it stands to take a 57 per cent stake in the bank. The Government will run the banks at arms' length, so Ministers do not have day-to-day involvement.

RBS chief executive Sir Fred Goodwin – who received £4.2m last year and asked shareholders for £12bn in April to shore up the group's balance sheet – is being replaced immediately, with chairman Sir Tom McKillop retiring from the board next April.

HBOS's chief executive Andy Hornby and chairman Dennis Stevenson are also to step aside when the bank is taken over.

Contractual entitlements, worth an estimated £2m for Sir Fred and nearly £1m for Mr Hornby, are being waived, which was heralded by the Chancellor as "the right thing".

Mr Darling said: "The Government doesn't want to run Britain's banks – it wants to rebuild them. The long-term future of UK banks lies in the private sector. We will aim to sell the public share in the participating banks as soon as feasibly possible.

"Our objective is to stabilise and rebuild, and we will maintain our stake for as long as it takes to do that."

Speaking on a visit to Halifax yesterday, Conservative leader David Cameron said the package was "painful and expensive" and represented "the day that the bills came in for a decade of too much borrowing".

Wall Street stormed back from last week's devastating losses yesterday, sending the Dow Jones industrials soaring 936 points after major governments' plans to support the global banking system reassured distraught investors. All the major indexes rose more than 11 per cent.

The increase follows precipitous losses that took the Dow down nearly 2,400 points.


Lloyds TSB: £17bn, 43.5%

The two banks will raise a combined £17bn. HBOS is taking £11.5bn, including £3bn through the sale of preference shares. Lloyds will receive £5.5bn, including £1bn in preference shares.

The Government will hold a 43.5 per cent stake in the combined group – assuming no take-up of new shares by existing investors.

Lloyds and HBOS have renegotiated the terms for their tie-up. HBOS shareholders will now get 0.605 Lloyds share per HBOS share, down from the 0.833 agreed in September.

HBOS chief executive Andy Hornby and chairman Dennis Stevenson will step down once the Lloyds takeover goes through.

The combined group will not pay a dividend on ordinary shares until the preference shares are repaid.

RBS: 43.5% £20bn, 57%

RBS is to raise £20bn through the £15bn issue of ordinary shares and the sale of £5bn in preference shares to the Government.

The Government will become RBS's majority owner with a 57 per cent stake – assuming shareholders do not participate in the share issue.

RBS chief executive Sir Fred Goodwin and chairman Sir Tom McKillop are to step down.

Dividends on ordinary shares will be cancelled until the preference shares are repaid.

Barclays: £6.5bn from private investors
Barclays is to raise £6.5bn, including some £3bn in preference shares, without calling on the Government for funding.

The group will raise the funds from existing investors.

The group's final dividend for 2008, worth about £2bn, is being cancelled.

Shareholder payouts will resume in the second half of 2009.

The bank says it remains eligible for government funding if its own capitalraising falls through.