American banks may have had to hang on a bit longer for their Government to announce a UK-style bailout, but maybe it was worth the wait. The terms on which they have agreed to take taxpayers’ money look much more generous than those imposed by Gordon Brown.

The British banks will have to fork out a stiff 12 per cent on the preference shares they sell to the Government. For the American banks, the rate will be only 5 per cent, at least for the first five years.

The US Government will also get warrants to buy ordinary shares worth 15 per cent of the preferred investment, a feature missing in the UK. But the exercise price will be roughly the current market price of the ordinary shares, so the dilution of the existing investors will not be too punitive. The US Government’s money is also much cheaper than that recently raised from private sources by Goldman Sachs and Morgan Stanley.

Warren Buffett is getting 10 per cent on the $5 billion of preference shares he bought from Goldman last month and his warrants give him shares at a discount to the current market price. Trust Buffett to get a better deal than the US Government.

The restrictions on executive pay being imposed by the US Government also look potentially weaker than in Britain. Nor is the American Government insisting that the banks scrap dividends on their ordinary shares until they have paid off the preference stock.

This is perhaps the most controversial aspect of the UK scheme.

British bank shares traditionally have been bought largely for their dividends, particularly by private investors, and there has been heavy selling by retail shareholders since the Government’s announcement.

This has put further pressure on the share prices of Lloyds TSB, HBOS and RBS, reducing the likelihood that many of the ordinary shares that they are going to issue to the Government will be clawed back by existing investors.

For much of yesterday RBS shares traded above the 65½p placing price, raising the prospect that many would be taken up by existing investors, reducing the outlay for Government.

It is conceivable that the Government could be left with much less than the maximum 60 per cent of RBS’s enlarged share capital. Lloyds, which historically had the highest yield of the big banks, has been hit particularly badly by the threat to the dividend. Its shares fell almost 7 per cent yesterday.

The dividend question also makes the acquisition of HBOS that much less attractive for Lloyds shareholders. This is because Lloyds would be taking on a big chunk of government preference stock that would have to be sold on or repaid before it could start paying dividends again.

Given the Government’s interest in minimising the taxpayers’ bill and ensuring that the HBOS deal goes ahead, it might be tempted to soften its stance on dividends. Investors who have sold bank shares already because of the announcement on dividends might feel justifiably miffed, however.

The big question, of course, is: will all this work? Since the banks will be well-capitalised – analysts estimate that Morgan Stanley’s Tier 1 capital will be almost 20 per cent – and most of the system will be guaranteed by governments, it dramatically reduces risk.

Stock markets have given the Government’s moves the thumbs up, but interbank lending rates have fallen only marginally so far. Hank Paulson can urge banks to use their capital, not hoard it. But he can’t force them.

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