Millions of investors who rely on bank shares for income were thrown into confusion by the government’s multi-billion- pound bailout last week.

Shareholders initially feared banks would have to suspend dividend payouts for up to five years, although the Treasury later confirmed they would be able to restart payouts sooner — as long as they had repaid the government.

The halt in payouts was one of the conditions of the Treasury’s plan to inject up to £37 billion of new capital into Royal Bank of Scotland, Lloyds TSB and Halifax Bank of Scotland (HBOS).

The unprecedented move means taxpayers could end up owning 60% of RBS and 40% of the merged Lloyds TSB and HBOS, assuming private shareholders do not stump up some of the cash.

Barclays is raising £6.5 billion without help from the government but has opted to halt dividend payments until the second half of 2009.

The four banks have 3.7m “small” shareholders, many of whom hold the stocks precisely because they have traditionally paid such generous dividends. Here we answer your questions.

What did the banks agree with the government?

On Monday the Treasury agreed to pump £37 billion into the three banks after it became clear they couldn’t meet the Financial Services Authority’s more stringent capital requirements.

RBS had to ask for the biggest sum — £20 billion, of which £15 billion will come from issuing ordinary shares and £5 billion from preference shares. HBOS will be raising £8.5 billion in ordinary and £3 billion in preference shares while Lloyds asked for £4.5 billion in ordinary and £1 billion in preference shares.

Existing shareholders will be given the chance to buy ordinary (but not preference) shares, so their existing holdings are not diluted.

What are preference shares?

Preference shareholders, as their name suggests, rank ahead of ordinary shareholders in the queue to get their income or their capital back.

The government is buying £9 billion of preference shares in the three banks in return for a fixed 12% a year for five years. The American government is getting only 5% in its equivalent bailout.

I’m a shareholder — what happens now?

You will be entitled to buy more shares in the three banks. To take HBOS as an example, the Treasury will take up £8.5 billion of shares at 113.6p, an 8.5% discount to its closing price on October 10.

The bank’s existing investors, including 2m small shareholders, will then be invited to buy back the shares under a system known as clawback, though full details are not expected until early December.

So what should I do with my shares?

Richard Hunter of the stockbroker Hargreaves Lansdown said: “The consensus in the market is that investors should hold, otherwise they will be crystallising their losses.”

What about income funds?

Darius McDermott of Chelsea Financial Services, an adviser, said: “Good equity-income managers will keep looking for firms with strong balance sheets that can deliver strong income streams — you only have to look at Neil Woodford, the top- performing equity-income manager, who has been out of banks for several years.”

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