The Treasury is looking at offering some of its lucrative preference shares in the banks to pension funds and other City investors to reduce the exposure of taxpayers' money in the bailout and enable City fund managers to buy in the expectation that they will purchase more ordinary shares in the three troubled banks.

Treasury officials are considering whether to allow financial institutions access to the £9bn of high-yielding preference shares the Government is buying as part of its £37bn bailout of Royal Bank of Scotland, HBOS and Lloyds TSB, The Times reports.

Under the original plan, the Government was to purchase all the preference shares, leaving ordinary shareholders with stock which paid little or no dividend. Ministers initially indicated the banks would not be allowed to pay any dividend while the preference shares were outstanding, but this has now been recognised as too draconian.

A decision could be made by chancellor Alistair Darling before Christmas. A Treasury spokesman said the main criteria determining the shape of the recapitalisation plan would be to preserve British financial and economic stability and to ensure that taxpayers receive good value.

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