£850bn - What the bank crash could cost taxpayers

• Halifax Bank of Scotland headquarters on The Mound, Edinburgh. Picture: Jane Barlow

The level of taxpayers' exposure to the beleaguered banking system is laid bare in an explosive report by the National Audit Office, as the row rumbles on over bankers' bonuses.

The massive liabilities include the cost of buying shares in Royal Bank of Scotland and Lloyds Banking Group, as well as guarantees to other banks and a loan to Bradford and Bingley building society.

The watchdog also reveals that the Treasury gave RBS a clean bill of health days before it was forced to hand over more than 36.6bn in emergency support for the bank.

By the end of this year, the state will have spent 131bn on bailing out banks, the watchdog said. But, taking into account the government's guarantees on loans, the taxpayer's total liability is 850bn.

The NAO said the government had been right to provide the unprecedented support to protect the stability of the banking system, which was sent into meltdown by the collapse of US investment bank Lehman Brothers last autumn.

The bank rescues succeeded in halting the spread of the crisis, while also safeguarding depositors, it said.

However, the government has failed to achieve improvements in bank lending to businesses, despite the billions of pounds of support, said the NAO.

Despite the huge debts racked up by banks – and the help given by taxpayers – finance bosses are insisting on handing out bumper payouts this year.

In defiance of the public mood, the board of RBS has reportedly threatened to quit if the government stops the largely state-owned bank paying generous bonuses.

Commons Leader Harriet Harman said she was "happy to condemn" banks that had been bailed out and still expected to "award themselves massive bonuses".

The row over remuneration will be further stoked by the 52-page NAO report, which shows the Treasury is paying bonuses of up to 5.8 million for external advisers on banking, drawn from the industry itself.

One investment bank – Credit Suisse – is expected to earn up to 15.4m in fees for emergency advice to the government on the banking crisis.

Ministers were criticised for hiring advisers for up to a year on expensive contracts that included the undefined bonuses, known as "success fees".

The NAO said: "In instances such as this, where criteria for success will be unclear, it is not good practice to enter into such an agreement in the first place, or to leave payment solely to the discretion of the procuring authority."

The cost of financial advice to the Treasury since September 2007 is expected to balloon to 107m by next April.

Amyas Morse, head of the NAO, said: "It is difficult to imagine the scale of the consequences for the economy and society if major banks had been allowed to collapse.

"The Treasury was justified in using taxpayers' money to safeguard savings and restore confidence in the financial system. But the big question is what all of this will eventually cost the taxpayer. This will take time to answer."

The NAO's recommendations include requiring the government to ensure any sale of its stakes in RBS and Lloyds takes into account not just price but also the wider impact on competition.

It also suggests a review of the various bodies charged with handling the part-nationalised assets by the end of 2012 to ensure "efficiencies".

Vince Cable, the Liberal Democrats' Treasury spokesman, said the report showed the sheer scale of debts owed to taxpayers by the banks. "Given this, it is astonishing that banks such as RBS are still failing to meet their lending agreements," he said.

"These banks should understand that, with the level of state support they have received, they must be run in the public interest."

It emerged last night that RBS and Lloyds are unlikely to meet their 2009-10 commitments for 27bn in lending to firms, and shadow financial secretary Mark Hoban said bonuses should not be paid to state-owned banks until they freed up lending again.

"The government continues to fail to get banks to lend," he said. "In order to get the economy going again, it is vital that banks lend more to businesses who are struggling to find finance – credit is crucial.

"This is why we would not pay out significant cash bonuses this year, diverting the capital instead to support more lending to hard-pressed businesses."

Edward Leigh, who is chairman of the Commons public accounts committee, also seized on the failure of the banks to revive their lending.

"The widespread suspicion that the bailed-out banks are using the injected funds simply to fill their pockets with gold will have been fuelled by the finding that those banks receiving taxpayer support are not likely to meet their commitments to lend to struggling businesses.

"The Treasury can do little if lending targets are not met."

Mr Leigh said it was "disturbing" that, for 13 months, the Treasury shielded parliament from any information on the extent of the rescue package for RBS and HBOS.

The Bank of England governor, Mervyn King, informed MPs only late last month about the bail-out, which was worth 62bn.

Today's report also reveals little was known about the scale of RBS's problems before it was bailed out with vast sums of covert emergency support from the Bank of England.

The NAO report says that, at the time officials signed off 10bn for HBOS in October last year, "internal papers prepared by the Treasury suggested that RBS's capital position was reasonably strong, but noted that the bank was increasingly dependent on short-term wholesale funding".

Just days later, however, the NAO says the authorities "unexpectedly found that RBS, too, could no longer access the wholesale funds it needed.

"Again, the Bank had to step in, covertly providing liquidity support to RBS from 7 October," the NAO says.

The Treasury said last night it welcomed the report and would provide a detailed response in time for a Commons public accounts committee hearing on 14 December. It added: "The government took unprecedented action to prevent the collapse of the banking system and put in place measures to stabilise the entire financial system. This highly technical exercise required advice from a wide range of experts.

"The vast majority of the costs incurred will be recovered from banks who were recipients of taxpayers' support."

Britain's huge reliance on the financial services industry has contributed to its sluggishness in emerging from the recession. The UK is the last major Organisation for Economic Co-operation and Development (OECD) country whose economy has still not returned to growth.