Many western governments had to rescue their banks over the past few weeks. Banks in the United States and Europe, including Iceland and Britain, were badly affected by the financial crisis.
Banks and other financial institutions invest in the US, where the turmoil began. So the crisis spread quickly.
If banks collapse, the whole economy will collapse. Hence, governments had to intervene. What did they do?
Re-capitalisation: Banks lend money to businesses and people who want to buy new equipment, a car or a house. For lending, banks use the money in their accounts. They also use their own money (capital).
They also invest what they don't lend.
As the financial meltdown deepened, banks had trouble lending money or even keeping enough cash for their deposits. Governments gave banks money to increase their capital. In return, governments now partly own these banks. And with enough cash reserves, banks can now operate normally.
