Britain’s largest banks are pressing the government to rethink the terms of its £37bn bail-out of the industry as investors take fright at the requirement for the banks to stop paying dividends to shareholders.

The government condition, imposed during negotiations last weekend, has undermined the share prices of Royal Bank of Scotland, Lloyds TSB and HBOS – the three lenders participating in the rescue – making it more likely that the government will be forced to take up its full shareholding in the banks.

Under the terms of the bail-out, the three banks are prevented from paying dividends to ordinary shareholders until they have fully repaid the preference shares, which have a combined value of £9bn.

Financial Times