Nov. 3 (Bloomberg) -- Prime Minister Gordon Brown pledged almost 40 billion pounds ($66 billion) in a second bailout of two of the largest British banks, saying the cash infusion will reduce the risk to taxpayers by up to 300 billion pounds.

The Treasury will inject 31.2 billion pounds into Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc, allowing the two institutions to scale back their dependence on government guarantees for their most toxic assets. It also pledged up to 8 billion pounds for Edinburgh-based RBS to use “in exceptional circumstances.” To fund the injection, the Treasury may have to borrow an extra 13 billion pounds.

“We have been able to reduce the liability we have from insurance of some of the major banks in this country, and there is going to be a benefit to the taxpayer as a result of that,” Brown said at a press conference in London today. “At the end of the day, banks will be paying money to the British public, not the other way round.”

Brown’s Labour government is seeking to claim credit for saving the financial system after the credit crisis triggered the first run on a U.K. institution in more than a century and forced the Treasury to take control of four banks. Last year, the government rescued RBS and Lloyds with 37 billion pounds of public money.

With an election no more than seven months away, Brown’s popularity has dwindled as the costs of the recession and the bank bailout put the public finances under their biggest strain since World War II. The Conservative opposition said today’s measures may not help the economy.

‘Elephant in the Room’

“Let’s not miss the elephant in the room,” said George Osborne, the Conservative lawmaker who speaks on finance. “The government is having to put another 39.2 billion pounds of taxpayer’s money into the banks, a bigger bailout than the original bailout last autumn. There is no guarantee that it will get credit flowing.”

The Liberal Democrats said today’s move would allow the banks to wiggle out of agreements to increase lending to consumers and businesses, an assertion the Treasury denied. Ministers said RBS and Lloyds will be prevented from paying discretionary cash bonuses this year to staff earning more than 39,000 pounds.

‘Sham’ Agreements

“The bonus agreements in both banks are a sham” and government claims that the bailout will save taxpayer money are “simply not true, said Vince Cable, a Liberal Democrat lawmaker who speaks on finance. “Until we can split up the banks in a meaningful way, so that taxpayers will not be forced to underwrite casino activities, all banks should pay a premium for the explicit support they receive.”

Chancellor of the Exchequer Alistair Darling said today’s agreements will spur competition in the banking industry by forcing both Lloyds and RBS to sell parts of their businesses accounting for about 10 percent of British retail banking. That, he said, will open the door to new banks to start up in the U.K.

“I would like to see perhaps three new entrants coming onto the high street,” Darling said on BBC Radio 4’s “Today” program. “We do need to be rigorous about competition. If you don’t you do find it hard to get credit and you do find it hard to get loans at the right price.”

Terms of Bailout

Under the terms of the agreement with RBS, the bank now will bear the costs of the first 60 billion pounds of any losses instead of 42 billion pounds it agreed to earlier this year. In exchange, the Treasury will allow RBS to take advantage of tax allowances worth up to 11 billion pounds that the bank originally had agreed to surrender to win Treasury protection.

The Treasury will inject 25.5 billion pounds of capital into RBS, increasing its stake to 84.4 percent from 70.3 percent. It will maintain its 43 percent holding in Lloyds by paying 5.7 billion pounds for new shares being offered to existing stockholders.

The transaction erases the prospect of the Treasury owning two thirds of Lloyds, which the company said in March was possible under some circumstances.

“This will significantly reduce the cost and the exposure to the taxpayer,” Darling said in Parliament. “Lloyds will begin its transition from state support to private finance.”

The purchases of shares will, all else being equal, add 13 billion pounds to the 220.8 billion pounds of central government cash borrowing forecast in the April budget, the Treasury said. There will be no impact on public-sector net borrowing, the government’s preferred measure, a spokesman said.

Lloyds’ Position

Lloyds will escape the Treasury program to insure 260 billion pounds of its assets, reducing a fee of more than 15 billion pounds to 2.5 billion pounds. RBS’s insured assets will drop by 43 billion pounds to 282 billion pounds.

By reducing the size of the Treasury’s umbrella protecting the two banks, taxpayers will shoulder smaller risks. So far, Darling has extended about 1.4 trillion pounds of support for the economy and financial institutions.

In April, the Treasury estimated potential losses on its support for the financial system at between 20 billion pounds and 50 billion pounds, or as much as 3.5 percent of national income. Today, Darling said he’d reduce that estimate in his pre-budget report, due within six weeks.

“What we’ve got here is better structured, a better deal for the taxpayer,” Darling said on BBC radio. “That does represent a major step forward.”

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To contact the reporter on this story: Reed Landberg in London at landberg@bloomberg.net.

Last Updated: November 3, 2009 11:19 EST