It was the weekend the City watchdog finally bared its teeth. Adair Turner and Hector Sants, chairman and chief executive respectively of the Financial Services Authority, had some nasty shocks for bank chiefs as they met the Treasury to negotiate the sums they would need from the taxpayer to recapitalise their institutions.

With the Chancellor in Washington and the Prime Minister trying to cajole other leaders into following the “British solution,” the FSA representatives took the chance to exert their influence on some of the most tense discussions Whitehall can have witnessed. The FSA had taken flak for failing to appreciate the scale of the crisis that was about to hit. It did not want to stand so accused again.

So when on Friday Andy Hornby, the chief executive of HBOS, who will stand down when the merger with Lloyds TSB is complete, was asked how much he thought his bank would need and replied “£3 billion”, he was told that he must be joking.

He was informed that the FSA, Bank of England and the Treasury were insisting on the toughest possible capital ratios – “core Tier 1”, in the jargon – to prepare the banks for the worst possible shocks in the future. They were told they had to imagine the grimmest possible financial and economic scenarios – a crisis that crops up every decade combining with a four-times-a-century disaster and a once in a lifetime catastrophe – when deciding how much they needed.

Mr Hornby and fellow executives from other banks got the same message. The sums would be far larger than they had expected or wanted. In the case of RBS, HBOS and Lloyds, everyone knew they had nowhere else to go.

Up until late on Sunday the Treasury thought that Barclays was in the same position. But, apparently told it would be required at least to double the £4 billion for which it was expected to ask, pride in the end won out and Barclays decided to try to go it alone and raise the money privately.

The FSA and the Treasury were in no mood to ease up on their vulnerable visitors.

One insider told The Times: “They wanted to bombproof the banks and the bombs they were using were nuclear.”

There had been a chilling omen for bank chiefs as they went into the Treasury for what turned out, for several of them, to be a weekend of humiliation as they finally had to admit defeat and ask the State for help.

It was Sir Fred Goodwin’s absence that concentrated their minds. His decision to conduct RBS’s rescue by telephone rather than in person was hardly surprising given that his own departure was an inevitable consequence of the operation. As yesterday’s events showed, for the chief executives of the other banks his empty chair was a ghostly portent of what might lie ahead.

On Thursday morning the Treasury had held a beauty parade to find the banking advisers it needed to put together a shotgun nationalisation of the banking system. The Government had already taken informal advice from two of London’s grandee investment bankers, David Mayhew, at Caze-nove, and Robin Budenberg, at UBS, and for weeks it had been using the City law firm Slaughter and May.

But by Thursday it was obvious that the Treasury needed a huge team of external advisers to put together the nuts and bolts of the nationalisation. These are lean times for bankers and almost every investment bank in London except Goldman Sachs – which had advised the Treasury on Northern Rock – pitched for the work. By Thursday afternoon dozens of bankers from Credit Suisse and a smaller team from Deutsche Bank were working for the Treasury, with the taxpayer picking up what is likely to be a hefty bill.

With Mr Darling at the IMF the negotiations were led initially by Yvette Cooper, the Chief Secretary to the Treasury, with Paul Myners, the new City Minister, at her side. With the ministers were the team of senior officials who had brokered the recapitalisation deal earlier in the week, Nick Macpherson, Tom Scholar and John Kingman.

With the banks in no position to resist their demands, the Treasury and FSA officials ushered each bank into a separate room to hear the worst.

When the scale of the sums required became clear, the Treasury made plain that it was ready to underwrite billions worth of ordinary shares, giving the taxpayer voting rights, to finance the rescue. Until then it had been intended that most of the bailout would involve preference shares. But the amounts of taxpayer finance needed had soared as bank shares plummeted last week, and now the Government needed more control.

Mr Darling was in the US capital but his thoughts were elsewhere.

He left the IMF early, missing a meeting of finance ministers, and flew home through Saturday night. On Sunday morning he checked in on the talks before grabbing about an hour’s sleep.

Later the Chancellor called his team of officials and ministers together in his private office to hear how things were going. After they left he briefed Gordon Brown, who was in Paris, about the progress of the talks.

There had been a serious wobble late on Saturday night when the prospect of Lloyds calling off its merger with HBOS entered the equation.

Bankers from Credit Suisse and Deutsche Bank had been hammering out a package for the deal with the Treasury for more than 48 hours. But suddenly the management of Lloyds TSB said it would not go ahead with its own rescue of HBOS unless the Edinburgh-based bank cut its asking price for the takeover.

The Treasury, meanwhile, would not go ahead with the bailout unless the two banks came to an agreement. Sources close to the event say the whole nationalisation package very nearly fell through.

Chiefs from the two banks were left outside in the corridor to sort it out. “They were like rats in a sack,” said one source. Throughout Sunday, failure remained a possibility and The Times was told by an insider that two banks – RBS and HBOS – would be in state control within days were the merger to be called off.

By late afternoon on Sunday another meeting in Mr Darling’s office heard that it was all but certain that RBS would take the cash, and Barclays looked like refusing while the real difficulty remained how the HBOS/Lloyds deal would survive government-enforced recapitalisation.

At last, at 9pm, the RBS deal was done. Then, an hour later, Barclays confirmed it wanted to go it alone. At 10.30pm Mr Darling decided he could serve little purpose staying up so left the last – and most tricky – details to be hammered out with HBOS/ Lloyds. On waking at 6.15am yesterday, the Chancellor was told that a statement was ready to be released to the markets.

The most extraordinary day in British banking history had begun.

Times Recommends

• Lloyds TSB wins vote for HBOS merger
• Bank of England discussed 2% rate cut
• Woolworths dives as it confirms takeover talks