Bank bail-out package hits snag

Uncertainty over key elements of Gordon Brown's £37 billion injection of cash into three troubled banks has emerged.

Negotiations are under way between the Treasury and executives of RBS and merger partners Lloyds TSB and HBOS over a condition to the deal which would bar the payment of dividends to shareholders until the Government's hefty stake is repaid.

Investor concern over this element of the package is understood to be behind volatility in the banks' share prices over the past few days, amid speculation it may scupper the merger plans of Lloyds TSB and HBOS, which have yet to be approved by shareholders.

Reports that the scheme may be adjusted to make it more attractive to private investors saw sharp rises in the banks' stock.

But Chancellor Alistair Darling has denied that the terms of the bail-out were being "rejigged".

He said: "We reached an agreement with these banks on Sunday. The banks had the figures then. It was a voluntary agreement. If they came through the Bank Reconstruction Fund, there were terms and conditions."

He added: "Of course, if somebody comes back with something that is demonstrably better for the taxpayer, then of course I would look at it.

"But I am not prepared to reopen an agreement reached just a few days ago. What we wanted to avoid was a situation where we put billions of pounds into a bank only to see that money go straight back out of the door again to non-Government shareholders."

Under the deal's terms, the three banks are prevented from paying out dividends to ordinary shareholders until they have fully repaid £9 billion of preference shares being issued to the Government. That appears to have been a major turn-off for investors, many of whom rely on dividend income.

The Government could end up owning about 60 per cent of RBS under the terms of the bail-out, and 43.5 per cent of the merged Lloyds TSB-HBOS bank.

Meanwhile, a measure that will allow the proposed merger to go ahead has been approved by the House of Lords. It allows the Government to waive competition law in the interest of "maintaining the stability of the UK financial system".

© Independent Television News Limited 2008. All rights reserved.