The men at the top of Scotland's two big banks are to go, after the government announced a £37bn bail-out. RBS chief executive Fred Goodwin has stepped down and RBS chairman Tom McKillop is to retire. HBOS chief executive Andy Hornby and chairman Lord Dennis Stevenson are also to stand down from their posts.

The news came as the government revealed plans to provide a £20bn bail-out of RBS and a £17bn investment of new capital in HBOS. The HBOS merger with Lloyds TSB is to go ahead but the terms are to be revised, meaning HBOS shareholders will get a poorer deal. "I am confident the banks will pick up eventually but we are looking at a dire economic situation just now" Sir George Mathewson Former Royal Bank of Scotland chairman.

Sir George Mathewson, former chairman of the Royal Bank of Scotland and the current chairman of the Scottish Economic Council, told the BBC Scotland news website this was the "direst and worst day for a long time". "I obviously welcome the stability introduced to the banking system but it is deeply regrettable that we have, effectively, government ownership of a large part of the banking system," he said. "I am confident the banks will pick up eventually but we are looking at a dire economic situation just now." BBC business editor Robert Peston said the move would change the way banks operated.

"Taxpayers would end up owning about 60% of Royal Bank of Scotland and about 40% of a super retail bank formed by Lloyds TSB buying HBOS. "That's what has been announced by the Treasury, in what will count as perhaps the most extraordinary day in British banking history." Chancellor Alistair Darling told BBC Radio Scotland that Sir Fred Goodwin and Sir Tom McKillop had waived their contractual entitlements. "I think they have decided to do the right thing there," he said.

He said RBS, Lloyds TSB and HBOS would be run "at arm's length" from the government, and ministers would not be involved in day-to-day decisions. Sir Tom McKillop said: "It is immensely regretful that we are coming to shareholders to raise funds again. "This is something that we certainly feel bad about." The government is to appoint three directors to the RBS board and two to Lloyds TSB. The new chief executive of RBS will be Stephen Hester, who is currently the chief executive of British Land.

He joined the RBS board as a non-executive director during the summer in a move widely seen as a precursor to Sir Fred Goodwin's departure. Sir Fred Goodwin was nicknamed "Fred the Shred" for transforming banks through aggressive deals which resulted in staff losses. His position had been under scrutiny after heavy losses as a result of the credit crunch and since its £12bn rights issue earlier this year. Sir Fred said the bank was "entering a new chapter that needed new leadership".