Perhaps the firewall went too far ... but it avoided disaster

The banks think the Government's bail-out plan has gone too far, particularly the terms attached to the injection of £37 billion into Royal Bank of Scotland, Lloyds TSB and Halifax owner HBOS. One of their main concerns is that they are not allowed to pay dividends to shareholders until much of the taxpayers' money has been repaid through dividend payments to the Government. Banks, particularly Lloyds TSB, were renowned for paying good dividends and shares have tumbled. There is also a feeling the terms imposed by the Government are more demanding than those demanded by the White House in the US bail-out.

Do dividends matter to me?

Yes. We are all affected through our pension funds. Dividends are usually a cash payment by a company to its shareholders, the owners of the company. The largest shareholders in these companies are traditionally pension funds. They need the dividends to pay our pensions and fund our retirement. If banks no longer provide this, they are far less attractive to pension funds, as seen by falls in the RBS, Lloyds TSB and HBOS share prices early this week, when the rest of the market was on the rise. Dividends also matter to anyone who owns shares themselves.

How is the US bail-out different from the one here?

The US plans to inject $250 billion into banks by taking preference shares, which give investors more protection than ordinary shares and pay a fixed dividend. The dividend owed by the US banks to the White House is significantly lower than that owed by UK banks to Downing Street, while at the same time US banks taking part in the rescue will still be allowed to pay dividends to ordinary shareholders.

Will the Lloyds TSB/HBOS deal take place?

Maybe, maybe not. HBOS shares have fallen so much in recent weeks that Lloyds TSB has already been forced to halve its offer price from £12 billion to £6 billion. HBOS shares have continued to fall, meaning the terms may be revised again. Critics are also worried that the merged megabank will control too much of the market, while questions have been raised over whether the deal is still required, given the Government has agreed to pump £11.5 billion into HBOS and £5.5 billion into Lloyds TSB. Both banks, the Government and regulators insist the deal will go ahead. But Vince Cable, Liberal Democrat Treasury spokesman, said: "There is a danger they are just going to go through with it because that was what they convinced themselves to do. But now it is not obvious that it is the course of action we should be pursuing."

Has the Government gone too far?

Ministers and regulators wanted to make the banks recession proof. They used extreme predictions of an economic downturn when working out how much money the banks needed and what the Government should get in return. The CBI says there is now a "mighty firewall around our major banks" and their futures look to have been secured. In return, the Government plans to put control on pay, cancel dividends to shareholders, and take a stake of 60 per cent in RBS and more than 40 per cent in the combined Lloyds TSB/HBOS. Critics argue too much taxpayer money is at stake given the risky strategy.

So did the Government panic?

It would be easy to accuse ministers of this now, with stock markets showing much-needed signs of steadying. But the authorities argue it was a necessary move as the strains last week meant there was a real risk of catastrophe. It will take years to know how successful this rescue really was, but in the short-term it has put banks on a firm-footing, restored customer confidence, and averted the sort of disaster that could have plunged the economy into depression.