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.
Bank executives have told ministers that the conditions attached to the preference shares, which pay a fixed interest rate of 12 per cent and cannot be redeemed for five years, will encourage the banks to rein in their lending – the opposite of what the bail-out plan is designed to achieve.