Competition works on the way up and the way down. Banks that spent the past 15 years scrambling over one another to extend limitless credit to hedge funds and other structured credit vehicles are now scrambling over one another to claw it back again.

The urgency is palpable. The competition to reach the exit first is suddenly every bit as intense as the competition once was to woo and win the client in the first place.

Loans are being called in; credit terms are being tightened; covenant breaches are being punished; extra collateral is being demanded; margin calls are being enforced; assets are being seized and sold.

There is only one rule: act first, because if you don't, rival creditors will get out first and leave you with nothing. Because of the sky-high levels of leverage, funds and businesses can implode with startling speed, as the collapse of Peloton, the hedge fund, showed last week.

Prime brokerage - the business of providing hedge funds with anything they desire from credit to IT services - has been a bonanza for a decade but banks are learning there can be a heavy cost.

The Federal Reserve's decision to inject more liquidity into the system and relax its collateral terms is well-intentioned and will provide extra lubricant to a banking system paralysed in places.

However, it won't alter sentiment. Bankers are rightly in a funk. The sensible thing might be to act co-operatively, to give over-borrowed clients breathing space, to agree standstill arrangements, to offer a bit of slack to prevent fire sales.

But competition does not work like that and the sheer number of creditors often makes such deals impractical.

Once one bank pulls the plug, or just looks like it might, others have little choice but to follow, or preferably to anticipate the capitulation and get out first.

Until freefalling American house prices start stabilising, it is hard to see an end to this malaise.

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