The News at Ten on September 13 last year was the first taste most Britons had of the credit crunch. But since mid-2006 the City had heard warnings from central bankers, regulators and economists that banks were lending too much, too cheaply, and that if liquidity in money markets seized up, disaster would occur.

Shareholders in HSBC also had early notice - the UK bank began warning in the third quarter of 2006 that its US business, which sold mortgages to poor Americans, was running into trouble, culminating in the company's first-ever profits warning in February 2007. People interested in the arcane activities of central banks would have noticed that on August 9 the European Central Bank injected an unprecedented €98 billion into money markets in an attempt to boost liquidity.

But the man in the high street knew little or nothing about the collapse of the US mortgage market and its knock-on effects until news broke that evening in September that Northern Rock, Britain's fifth biggest mortgage lender, with about £24 billion of customers’ deposits, had sought an emergency loan from the Bank of England.

The following morning, the country’s first bank run in more than 100 years stripped £2 billion from the Rock’s coffers. With fewer current account customers than its rivals, Northern Rock was more reliant on funding from the wholesale market, provided by other banks as well as investors such as fund managers. When wholesale lending dried up, the Rock could not fund new business.

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In the following months, the bank’s chairman and chief executive quit, it borrowed a total of £26 billion from the Bank of England to stay afloat and an unsuccessful six-month campaign to sell the bank began. Northern Rock was nationalised in February and this month reported a £585 million loss.

By now, however, the Rock’s losses have been dwarfed by those taken by other UK banks. Figures from Sanford Bernstein show that Britain’s banks have taken an £18 billion hit to their profit and loss accounts in the last two halves, not counting losses unveiled by Barclays and Royal Bank of Scotland in recent days.

Most UK high street banks had bought complex investments such as collateralised debt obligations and asset-backed securities, which often contained US sub-prime mortgages. When the US housing market was booming, the investments produced a steady stream of income for the banks. But when Americans stopped paying their mortgages, the investments plunged in market value and some of them stopped producing the income that they had promised.

Banks had no way of knowing how much of these investments their rivals were sitting on, or what kind of losses they were taking, so became nervous of lending to each other. No one knew who might be the next Northern Rock. At the same time, the banks were keen to hoard any cash that they did have, in case the liquidity crisis worsened. Central banks in Europe have pumped billions into the money markets since last August but this has done little to ease conditions. On August 6, the interbank lending rate for three-month sterling was 5.78 per cent, down just 0.35 per cent on August 8 last year.

Losses on sub-prime investments meant that the UK banks’ balance sheets were weaker. With regulators feeling increasingly nervous about the possibility of a bank collapse, there has been pressure on banks to boost the capital cushions that they set aside for bad times. British banks have raised more than £20 billion from shareholders this year, which has hit shareholders hard. To add to their pain, an index of the UK banks shows how much value the companies have lost since August 9 last year, having fallen more than 33 per cent.

Over the past 10 days, Britain’s banks have been reporting their results for the first six months of 2008. They have made grim reading. Three-month arrears on mortgages are rising, although from a historically low level. Banks have reined in their lending; according to Moneysupermarket.com, the number of mortgage products on the market has plunged by 23,291 to 5,068.

Lloyds TSB revealed a 70 per cent fall in pre-tax profit, HBOS was down 72 per cent, with both reporting an increase of more than 30 per cent on bad debts. Alliance & Leicester said that its profits had been wiped out by losses on structured credit investments. HSBC’s profits fell by 28 per cent and Barclays said that it profits were down 33 per cent. The Royal Bank of Scotland revealed a record £692 million loss last Friday, a record for a British bank.

But analysts expect trading to become even more difficult for the UK banks in the second half. We have seen £10 billion worth of bad debt charges so far, but Sanford Bernstein calculates that if the UK continues its slide into recession, UK banks would take loan impairment charges of £25 billion in 2009 and £36 billion in 2010. Banks are already reporting signs of distress amongst customers; HSBC said this week that Britons typically had 5 per cent less money in their bank accounts than a year ago. A recent report from Standard & Poor’s is telling. Of Europe’s 50 largest banks, just one has been assigned a positive outlook.

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