The Royal Bank of Scotland share price touched an eight-year low yesterday. Pretty much all the fabulous shareholder wealth created in happier times by buying, subsuming and turning round NatWest has evaporated.

The value destruction in the past year amounts to £33 billion. That’s equivalent to five entire Marks & Spencers or ten BAs.

Bluntly, what happens at RBS and the other big banks matters much more than the doings of many companies that grab more media and City attention. For pension fund incomes, for tax receipts and for the general economy, RBS is important.

That Sir Fred Goodwin, RBS chief executive, succeeds in reversing the share price damage of the past year matters rather more than the doings of Sir Stuart Rose or Willie Walsh.

General credit crunch concerns, doubts about the wisdom of the huge and complex ABN Amro acquisition and fears that RBS could be forced into an emergency capital-raising to shore up its balance sheet have all soured investor sentiment.

It is less than a year since Sir Fred declared himself out of the City sin- bin as he won plaudits for raising the dividend and for (apparently) recanting his acquisitive past. How wrong that view turned out to be when he charged into the ABN auction a few weeks later.

He is hamstrung. He wants to be able to press ahead with the carving up of ABN and rejuvenation of the parts allotted to RBS, but can’t go public on his plans until the Dutch central bank gives him its blessing. The hope in Edinburgh is that this will be in time for the annual results on February 28.

RBS is caught up in a wider curdling of confidence about the entire UK banking sector. Older and wiser analysts are starting to recall how banks were regarded by investors 25 years ago — accident-prone, blundering and seemingly incapable of lending money to people who would pay it back. Then it was botched loans in Latin America and to property developers. This time it’s mortgage- backed securities and leveraged buyouts.

The UK banks have won a reputation for better risk control and analysis since then. With that better reputation have come much higher stock market ratings. Their shares have, over most of the past two decades, traded at about ten times profits and twice book value.

But as Goldman Sachs points out in a chilling note this week, that was not always the case. Before and during the last deep recession in the late 1980s and early 1990s, bank values were languishing at five times profits and little more than book value. They could return towards that level if their reputations continue to be dented: the originate- and-distribute model — the common practice of selling on loans to third parties — is on the wane. Financial leverage is being unwound. And the UK slowdown is certain to push up bad debts. UK banks are not as cheap as those with short memories might imagine — they could go cheaper. Goldman can’t find a single UK bank to recommend as a “buy”, even though they all yield 7 per cent or more.

UBS calculated yesterday that RBS might have to raise up to £8 billion of fresh equity to beef up its balance sheet. That would dilute shareholders, many of whom already feel let down by the volte-face last year. The message from one major institution yesterday was ominous: Sir Fred might have to pay for a rights issue with his job.

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