The Treasury's plan to shore up British banks is an intelligent and measured response to the financial crisis. It will provide much-needed new capital, while rightly placing the greatest burdens on those banks that have been the most irresponsible. It limits the eventual cost to taxpayers by avoiding nationalisation - and in doing so preserves the City's prospects as an international financial centre. This may not end the gloom, but it should end the panic. HBOS, which had seemed in danger earlier in the week, now looks secure.

The plan attacks the two problems at the heart of the credit crisis: lack of capital and lack of liquidity. By changing the rules on capital ratios, the Treasury will force banks to build bigger cushions of capital. Some, such as HSBC, have no need to call on public funds to do so. Others will take advantage of the Government's offer to take “preference shares” worth up to £50 billion. Even more critically, the Government will help banks to fund the gap between loans and deposits by guaranteeing short-term and medium-term debt issues. This should reassure companies and financial institutions that it is safe to lend again, knowing that those loans will be guaranteed by the State. It is a deft move which should help unfreeze the flow of loans to banks.

The Darling plan is a boost to confidence. It avoids the kind of shareholder wipeouts that have accelerated the panic in America. Yet here it is arguable that the Government has not struck a hard enough bargain. It is not yet clear what rate of return the Treasury will be getting on its preference shares. By choosing to make loans, rather than to take equity stakes, it has minimised the risk of losing any taxpayer money. But it has also limited taxpayers' potential share of the upside should share prices shoot up again. The banks seem to have struck a surprisingly good deal.

In that context, it is all the more important that the Chancellor considers how to tackle the appalling failures of leadership that have been demonstrated by so many of those in charge. The banks that must now go cap in hand to taxpayers have been spectacularly mismanaged. Those who run HBOS will pay the price, if the takeover by Lloyds TSB goes through. But there are many others who should take responsibility for irresponsibility. Sir Fred Goodwin, the chief executive of Royal Bank of Scotland, should never have let capital fall to dangerously low levels, nor have pursued the reckless takeover of ABN Amro. There are also serious questions to be asked about the role of board directors and non-executive directors. What role did they play in making UK banks some of the most over-extended in the world? What questions did they put? The Financial Services Authority must surely ask whether they fulfilled their duties as directors - and find some wanting - as well as looking into executive pay.

Banks that seek public backing must be prepared to change their lending practices and, in some cases, their personnel. These were not minor misdemeanours. The behaviour of these companies has helped to push the UK towards serious recession. The IMF cautioned yesterday that the world economy is entering a major downturn - which makes yesterday's co-ordinated rate cuts by central banks particularly welcome. The cuts will alleviate some of the collateral damage from the credit crunch that is being suffered by businesses and mortgage holders. Further cuts will be needed.

We all know, now, that the boom was over-bought. With luck, the bust has also been over-sold. Alistair Darling's plan is a good one, which should restore confidence. But the public also need to see some heads roll.