By Jodie Ginsberg and Steve Slater
LONDON (Reuters) - Britain waded in with 37 billion pounds ($64 billion) of taxpayers' cash to bail out three major banks on Monday, in a move that could make the government their main shareholder.
In return the banks will be forced to curtail the bonuses that many believe encouraged a risk-taking culture that precipitated the global financial crisis. They will also have to scrap dividends.
Under the UK plan, Royal Bank of Scotland will boost its capital by 20 billion pounds, issuing 15 billion pounds' worth of shares underwritten by the state, and 5 billion pounds in preference shares directly taken by the government.
HBOS and Lloyds TSB will also participate in the scheme "upon successful merger."
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."
BROWN BENEFITS
The measures are being echoed across Europe as countries try to adopt a common approach to avoid a meltdown in the financial system and its knock-on effects on the global economy.
Prime Minister Gordon Brown said he believed Britain was taking the lead in dealing with the crisis.
"This is perhaps the first government to do what I believe a large number of governments are going to do over the next few days," he told a news conference.
In a speech later to City executives, Brown said the world's leaders needed to reform the financial system with the kind of courage and foresight their predecessors had shown when drawing up the post-war financial order in the 1940s.
"We must now reform the international financial system around agreed principles of transparency, integrity, responsibility, good housekeeping and co-operation across borders," he said at the London headquarters of Thomson Reuters.
Brown's handling of the financial crisis appears to be rebuilding his reputation with voters.
"I'm quite glad Brown's in charge because he seems to know more what he's doing than anyone else," Henry Gogherty, a consultant from London, told Reuters.
A YouGov poll published by the Sunday Times at the weekend showed the opposition Conservative Party's lead has halved from 19 percent to 10 percent over the last month.
EUROPE ACTS
The German Chancellor Angela Merkel is set to give further details at 1 p.m. GMT (9 a.m. EDT) of a draft bill seen by Reuters that earmarks 400 billion euros ($550 billion) in guarantees for banks and will also give them fresh capital.
In Paris, a report by Dow Jones Newswires said the French government would create a 40 billion euro fund to take stakes in banks, though there was no official comment. Italy is also expected to take measures to shore up their banks.
In the UK, Lloyds, which agreed to buy HBOS as part of an earlier bank rescue plan, said it had revised down the price it was paying to 0.605 of a Lloyds share per HBOS share from 0.833 previously.
Barclays said 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, meaning it could become the biggest shareholder, and even a majority investor, in RBS and a combined HBOS/Lloyds TSB.
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.
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," said RBS chairman Tom McKillop, who will also be stepping down.
SHARES REACT
Shares in RBS were down 9.6 percent at 64.8 pence by 12:30 p.m. GMT (8: 30 a.m. EDT), and HBOS had fallen 22 percent to 96.8 pence. Lloyds TSB was down 8.2 percent.
"No dividend for five years, no growth in the business, not a great investment," a trader said.
Another added: "If Royal Bank of Scotland share prices continue to slide, it's going to be fully nationalized. (The government) cannot afford to let it go down like this."
Other banks rose, however. Barclays was up 6.3 percent, and HSBC was up 7.5 percent.
"It does solve the liquidity problem. This is the end of chapter 2 of the horror story, but unfortunately chapter 3 -- the recession -- is on the way," said James Hamilton, banks analyst at Numis Securities of the RBS share fall.
Bank-to-bank sterling lending rates for three months slipped slightly to between 5 and 6 percent from well over 6 percent on Friday but are still far in excess of the Bank of England's target rates.
(Additional reporting by the UK bureau; Editing by Andrew Callus/Will Waterman)
