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The government is to invest £37 billion in Royal Bank of Scotland (RBS), HBOS and Lloyds TSB in an unprecedented move.

RBS will take a total of £20 billion - £15 billion in ordinary shares at an 8.5 per cent discount on the Friday closing price and £5 billion in preference shares. The RBS chief executive Sir Fred Goodwin is to resign.

HBOS will take £10 billion and Lloyds TSB will take £5.5 billion, while the government will be the biggest shareholder in the RBS and HBOS.

The combined Lloyds/TSB HBOS firm – after the merger deal is completed - will have a government stake of 43 per cent, although the details of the merger will be renegotiated.

Sir Tom McKillop, chairman of RBS, said: "The steps we have announced today, taken in conjunction with the government, will secure a stronger future for the RBS group. We regret having to raise new capital but believe that decisive action is necessary in this unprecedented market environment."

As a part of the deal, the banks were forced to maintain the availability of competitively-priced lending to homeowners until 2011 and to small businesses at 2007 levels.

Senior executive bonuses will be under control and the government has the right to appointment non-executive directors.

A Treasury statement read: "The overall aim of these measures is to support stability in the financial system; to protect ordinary savers, depositors, businesses and borrowers; and to safeguard the interests of the taxpayer."

Barclays has stated it will raise the necessary cash to reach the right capital level demanded by the Treasury from investors without calling on government funding.

By the end of the year, the firm will raise around £3 billion through issuing preference shares.