£50bn bid to save UK banks

Gordon Brown will today announce the use of up to £50bn of taxpayers' money to take major stakes in high street banks, in a last-ditch attempt to restore confidence in the financial system.

Precipitous collapses in shares of Royal Bank of Scotland and HBOS forced the government to accelerate a plan to partially nationalise the bank sector, which teetered on the brink of collapse yesterday.

After another tumultuous day, Brown summoned the Bank of England governor, Mervyn King, and Financial Services Authority chairman, Lord Turner, for emergency talks last night on the future of the banking system.

They also discussed concern that UK customers of the collapsed Icelandic bank Landsbanki risked losing thousands of pounds in savings. The Treasury is racing to hammer out a rescue for the high street banks and holding high-level negotiations with Icelandic authorities about the payouts for 300,000 customers of Icesave, an offshoot of Landsbanki, who have a total of £5bn saved with the bank.

Brown and his embattled chancellor, Alistair Darling, were preparing an announcement for this morning outlining historic changes to the way the banking system is owned and operated. "We have been working closely with the governor of the Bank, the FSA and financial institutions to put banks on a longer-term sound footing," Darling said after last night's meeting in Downing Street. He said the Bank had again put large sums into the money markets over the day, and was ready to do more if necessary.

"I intend to make a statement before the markets open tomorrow morning and I will be making a further statement to the House of Commons later in the day."

Darling had rushed back after spending the morning in Luxembourg at a crisis meeting of European finance ministers.

It is thought the government plans to spend up to £50bn on preference shares - which count above ordinary investors - to take stakes in the banks, thereby bolstering their capital cushion and attempting to demonstrate they are no longer vulnerable to collapse after the nationalisation of Northern Rock and Bradford & Bingley, and rescue takeover of HBOS.

The government will also announce a standby liquidity facility to try to ease the paralysis in the money markets.

Brown will present the package as a "stability and reconstruction plan" to distinguish it from the US treasury bail-out. It will contain measures to curtail bonuses of banking executives to prevent the backlash which hit American proposal.

No 10 stressed that the Treasury had been working for weeks on the package, which was discussed in outline by the cabinet yesterday. One government source underlined the comprehensive nature of the response: "The test of the announcement will not be the share price of an individual bank tomorrow, but where we will be in four to five years' time."

No 10 was trying to insist last night that there was no panic among the authorities despite the collapse of bank shares amid expectations of government intervention.

Downing Street said the 90-minute meeting with the Bank and FSA was not an emergency response, but had been in the diary for some time as one of a series of regular discussions. "We continue to act in a calm, orderly and responsible manner," the prime minister's spokesman said.

However, No 10 had not mentioned the meeting earlier and officials were clearly irritated that a private gathering with the bosses of the leading banks and the chancellor on recapitalisation on Monday night had leaked and in part contributed to yesterday's collapse in bank shares.

The impact of the credit crunch was evident last night. The combined stockmarket value of Barclays, Royal Bank of Scotland, Lloyds TSB and HBOS was £50bn - half the £106bn of HSBC, which is seen to be withstanding the financial crisis.

The government's influence was further undermined by the huge fall in HBOS shares, which traders said reflected real concern for the government-brokered takeover by Lloyds TSB. Lloyds is offering £9bn for HBOS - double the £4.9bn to which its value has slumped . The collapse in the share price of RBS to 89p took its market value to £14bn.

The bank plan does not cover building societies, which are concerned they will be left at a competitive disadvantage. The Building Societies Association said: "In view of the extraordinary market conditions, any assistance the government makes to banks should also be made available to building societies, even though we have no indication at the moment that any would need such assistance."

The evaporation of confidence in British banking came as the worldwide crisis escalated. Australia cut interest rates by one percentage point - the biggest reduction in 16 years - amid rising expectations that the Bank of England's monetary policy committee will cut rates tomorrow despite the rise in inflation.

There was evidence of panic selling in the US last night as Wall Street suffered its second worst day of the crisis to date. The Dow Jones industrial average dived 508 points to 9,447, partly driven by bust hedge funds liquidating their portfolios. Bank of America, saw its value plunge by a quarter.

Ben Bernanke, chairman of the US Federal Reserve, made a dramatic shift in tone on interest rates as he described the crisis as of "historic dimension". Markets took this as meaning the Fed may make an emergency interest rate cut from the current 2% level.

There is also pressure on the Bank of England to cut rates amid signs the economy has tipped into recession. Manufacturing output had its sixth consecutive monthly contraction in August, its worst run since 1980, according to a leading economic thinktank.