Ray of light as banks hang in the balance

Banks, like Jade Goody, are rarely out of the headlines these days. And like the reality television star, their decline has transfixed the nation.

Since the run on Northern Rock 18 months ago, topics that were previously matters for the financial press are now of wider public interest. Last week ­was no exception, as HSBC prompted large stockmarket falls by announ­cing a proposed £12.5 billion rights issue.

Details of a £250 billion toxic asset insurance package for Lloyds also emerged on Friday, and commentators calculated that the deal could result in the government taking a 70% stake in the bank. The news marked the latest stage in the government’s Asset ­Protection Scheme, following on from Royal Bank of Scotland’s £325 billion insurance agreement last month.

Meanwhile, the saga of Sir Fred Goodwin’s pension arrangements rumbled on, as politicians spotted the chance for a quick popularity fix. John Mann, MP for Bassetlaw, was the latest to take aim at the former RBS chief executive, by proposing the taxation of pensions above £700,000 at 90%. The move would reduce Goodwin’s annual income to £70,000 and “see taxpayers’ money returned to the coffers,” he said.

Indeed, such was the volume of negative sentiment on banks that Standard Chartered’s annual results received comparatively little attention. But for embattled financials investors they provided a rare moment of cheer, as the bank announced that not only had it survived in 2008, it had gained market share as risk-averse rivals reined in their non-domestic exposure. Pre-tax profits were up, as were total assets and dividends per share.

Nevertheless, the British banking sector remains in a precarious position. This week’s Fund Strategy cover story by Abigail Montrose looks at the development of the crisis over the past 12 months and examines concerns over how much further nationalisation will go. According to Tim Gibbens, a financials ­analyst at Alliance Trust, the answer could be: much further, if macroeconomic conditions continue to deteriorate at current rates.

The future of British banks hangs in the balance. Much depends on the success of the Asset Protection Scheme and quantitative easing in restoring confidence to the sector, and the economy.