The Asset Protection Scheme, backed by taxpayers, aims to strengthen bank balance sheets and encourage banks to lend more to firms and individuals.

Chairman Philip Hampton blamed the massive loss on the "unprecedented turbulence" in financial markets and deteriorating conditions around the world.

"We owe our continued independence to the UK government and taxpayers and are very thankful for their support," he said.

He warned that 2009 would be another tough year.

The bulk of the losses came as RBS made a £16.2billion write-down on poorly peforming assets, mainly resulting from its 2007 takeover of ABN Amro at the height of the boom. The bank said its total pre-tax losses for 2008 on a statutory basis were £40.7billion.

It said underlying losses totalled £7.9billion.

RBS will pay £6.5billion to the Treasury to take part in the Asset Protection Scheme, which will be funded by the issue of B shares, in addition to the £13billion issue, it will agree not to claim some UK tax losses and allowances. The new shares would count towards the group's core capital.

It said it would liable for the first £19.5billion in losses on the assets insured as part of the scheme.

"Participation in this scheme would assist us in reducing risk for shareholders whilst providing greater support for UK customers via increased lending," said RBS chief executive Stephen Hester.

"It would provide increased certainty to the market by limiting potential losses on a significant proportion of our balance sheet."

Lloyds Banking Group is also expected to take part in the scheme, which could see taxpayers guaranteeing up to £600billion worth of toxic debt.

Mr Hester also announced a "sweeping" shake-up of the group's business.

He said that the bank would be separated into two arms, with the bank's riskier assets and operations grouped together.

RBS promised to increase lending to UK homeowners and businesses by £25billion over the next 12 months, of which £9billion would be mortgage lending.

The bank's overseas business would be cut back, with its operations to be reduced or sold in 36 of the 54 countries it works in.

However, he gave no details on expected job losses, angering union representatives, as reports had suggested job losses could total 20,000.

"We are extremely frustrated by the lack of clarity over the company's restructuring proposals with no firm detail on jobs," said Unite's joint general secretary, Derek Simpson

"The uncertainty hanging over the heads of these workers is unacceptable."

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