The extra capital will initially be made available to eight of the UK’s largest banks and building societies, including Barclays, the Royal Bank of Scotland, HBOS, Lloyds TSB and HSBC, in return for preference shares in the institutions.

The measure failed to prevent a continued fall in the FTSE 100 however, with the index down 4.51 per cent by mid-morning trading.

Bank share prices were mixed; while HBOS registered an initial recovery of 46 per cent in share value and the Royal Bank of Scotland shares rose 16 per cent, Barclays continued to be hammered, with an 11 per cent drop-off.

The plan included a number of key points: banks will have to increase their capital by at least £25bn and will be able to request funding from the government to do so; a further £25bn of extra capital will be made available in exchange for preference shares; short-term loans available from the Bank of England will be doubled from £100m to £200m; and £250bn in loan guarantees will be made available at commercial rates to encourage inter-bank lending.

Participation in the scheme comes with certain conditions however, with institutions having to sign up to an FSA agreement on executive pay and dividends.

The plan has been welcomed by the banks, which had been pressing for action from the government in recent days.

“The government’s announcement represents a very real and serious intention on the part of the authorities, following consultation with the banking industry, to bring stability and certainty to the UK banking system,” HBOS said in a statement.

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