By Jodie Ginsberg and Steve Slater
LONDON (Reuters) - Britain bailed out three major banks with 37 billion pounds ($64 billion) on Monday, as European governments used taxpayers' cash to take control and boost confidence in the battered industry.
In return for the British government's cash, which could make it the main shareholder in at least two of the banks, they will be forced to curtail the bonuses that many believe encouraged a risk-taking culture that precipitated the global financial crisis. They will also scrap dividends.
Finance Minister Alistair Darling said extreme times called for extreme measures and that he was prepared to make even more money available if necessary.
"It's necessary because we are going through quite extraordinary circumstances the world over, and I'm determined to do everything we can to stabilize our banking system and make it stronger," he said.
"And in return for it, of course, there will be restrictions on what happens in boardroom pay, and we're also getting guarantees in relation to increased lending to businesses, as well as to mortgages, too."
The measures are being echoed across Europe.
In Paris, a report by Dow Jones Newswires said the French government would create a 40 billion euro ($55 billion) fund to take stakes in banks, though the French presidential office declined to comment on the report.
Under the UK plan, Royal Bank of Scotland will boost its capital by 20 billion pounds, with the government taking 5 billion pounds in preference shares and a share issue of 15 billion pounds underwritten by the government.
HBOS and Lloyds TSB will also participate in the government scheme "upon successful merger," the Treasury said.
Lloyds, which as part of an earlier bank sector rescue plan had agreed to buy HBOS, said it had revised down the price it was paying to 0.605 of a Lloyds share per HBOS share from 0.833 previously.
The UK Treasury laid out a series of conditions attached to the bailout, including a commitment by the banks to lend to homeowners and small businesses at 2007 levels, limits on executive pay, and government input on new board appointments.
Barclays said in its own statement it would boost its capital by more than 6.5 billion pounds but expected to do so without government help.
The British banks will try to sell shares to existing investors, but the government will buy any shares not taken up.
RBS chief executive Fred Goodwin became the highest profile British bank executive to lose his job to the crisis. He will be replaced by Stephen Hester, chief executive of British Land and a former Abbey National banker.
The rescue plan could result in the government becoming the biggest shareholder, and even a majority investor, in Royal Bank of Scotland and a combined HBOS/Lloyds TSB.
RBS has been criticized for a highly acquisitive strategy that catapulted it from a domestic player to one of the world's biggest banking groups in less than a decade.
"Leverage is great in boom times, but it can be awfully dangerous when things get difficult, especially if they get difficult very quickly," chairman Tom McKillop said.
Shares in RBS had dropped 5 percent to 67 pence by 4:10 a.m. EDT, and HBOS fell 9 percent to 112 pence in early trading, but the rest of the sector jumped.
Barclays was up 13.5 percent at 235.5 pence, and Lloyds TSB shares climbed 10.4 percent to 209 pence.
"Overall, we continue to believe that measures put in place by the UK Government, as well as the huge amount of liquidity being pushed into the system by the BoE are extremely useful for the sector," said Credit Suisse analysts.
"However, equity holders remain at risk from higher impairment charges and equity dilution. Valuations do not take sufficient account of this yet, in our view."
Germany and Italy are also expected to take measures to shore up their banks, and French president Nicolas Sarkozy predicted a series of announcements. According to media reports the German plan could be worth 400 million euros.
(Editing by Andrew Callus/Will Waterman)
