Banks given hopes of a dividend payout after revolt over £37bn rescue

In a day of intense negotiation, banking sources suggested that the Treasury was discussing ways of "clarifying" the part-privatisation of Royal Bank of Scotland, HBOS and LloydsTSB.

Chancellor Alistair Darling was facing a City revolt over the hardline terms of the deal, which bans the payout of a dividend until all taxpayers' money is repaid.

But it was claimed that the detail of the deal would allow dividends after a year, as long as the banks can prove their balance sheets are healthy once more.

The Treasury today confirmed that negotiations were "ongoing" but stressed that none of the headline terms of the deal had been changed.

Sources said that any clarification would depend entirely on whether ministers decided it was in the taxpayers' interest.

"Any changes would require our permission," a source said.

Earlier the Government had come under fire for its decision to stop dividends being paid out and to ask banks to return to lending levels of last year's boom.

Falls on Monday and yesterday in the share prices of RBS, HBOS and Lloyds TSB prompted senior bankers to urge the Treasury to water down its plans along the lines of the package unveiled by President George Bush.

Despite a wider rally in the FTSE, shares in the three British banks have continued to plunge.
All three are worth less than when the Government offered to buy their shares, leaving the taxpayer with a paper loss of nearly £3 billion.

Downing Street and the Treasury played "hardball" with the banks earlier today, insisting that they were in no mood to renegotiate the deal.

Whitehall officials pointed out that the banks had failed to grasp the scale of the crisis as late as last week. One Government source said: "It's hardly surprising that the banks are coming under pressure from their own shareholders. But the banks made their announcements alongside the Government and entered into this voluntarily."

William Hague, standing in for David Cameron at Prime Minister's Questions, attacked the Government for the confusion over its stance on bank lending. He pointed out that Business Minister Baroness Vadera had said no bank should be "forcibly" required to lend at 2007 levels.

Some critics claim the Lloyds TSB takeover should not now go ahead because it will harm competition and give the state too much control over mortgages and saving. They argue the merger is not needed because HBOS can be rescued by the government cash injection alone.

A spokesman for the Prime Minister said he had no plans to change his decision to allow the Lloyds TSB merger with HBOS to go ahead.

City traders feel that the £6 billion rescue of Halifax owner HBOS by Lloyds TSB is looking in jeopardy. When Lloyds launched the takeover bid, personally brokered by Gordon Brown and Sir Victor Blank, Lloyds' chairman, it valued HBOS at £12.2 billion.