This morning the UK government announced details of a £50bn rescue plan for the British banking system. The extra capital will be made available to eight of the UK’s largest banks and building societies in return for preference shares in them.

Gordon Brown said that the rescue plan is “designed to put the British banking system on a sounder footing.” However the FTSE 100 in London fell 5 percent. HBOS shares rose 26percent but Barclays fell 11 percent and Standard Chartered dropped 13 percent.

The key points of the rescue plan are:

• Banks must increase their capital by at least £25bn and can borrow from the government to do so.
• An additional £25bn in extra capital will be available in exchange for preference shares.
• Short term loans from the Bank of England have increased from £100bn to £200bn.
• Up to £250bn in loan guarantees will be available at commercial rates to encourage banks to lend each other.
• To be involved in the scheme banks will have to sign an FSA agreement on executive pay and dividends.

Banks have been taking criticism for being unwilling to lend to each other, so the government hopes that if those loans can be guaranteed then lending will resume.

“This is beginning a process of un-bunging a big problem where banks won’t lend to each other for long periods,” Mr Darling said.

Barclays, HBOS, HSBC, Lloyds TSB, Abbey, RBS, Nationwide Building Society and Standard Chartered have all agreed to take part in all aspects of the scheme. The Treasury said that any other banks can apply to be included in the plan.

Preference shares pay a fixed rate of interest instead of a dividend, which has to be paid before other shareholders receive anything, but they do not carry voting rights.

Although taxpayers may end up making a profit from the shares, this is not guaranteed.

There is hope the deal will get the money markets moving again and assure the future of the banking system.

“They’ve got additional capital now if they want it, they’ve got an unlimited source of liquidity,” said Terry Smith, chief executive of the money brokers, Tullett Prebon.

“That certainly should stop the panic in terms of people wondering whether or not the banks are safe.”

The deal has also been welcomed by banks who have been feeling the pressure of late.

“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.

Barclays, Lloyds TSB and RBS also issued statement welcoming it.