Bank failure is a wretched business. It starts with a sliding share price, the rumours circulate around the City of London, and the balance sheet comes under scrutiny.
Then the deadly questions begin. How much capital does the bank have? What are its funding sources? What is the extent of bad loans? If the answers aren't satisfactory, the share price dives off a cliff, and bank suddenly becomes a political issue. Is it too big too fail; or can it sink?
The bank could be days away from an Northern Rock style bank run. Formally speaking, its deposits have only a limited guarantee. Perhaps I missed the memo, but I haven't heard the government offering to supplement the existing arrangements with a NRK-like blanket guarantee from the Treasury. Savers are already spooked by the demise of Lehmans. All it takes is just one slack teller with a largish queue in one branch and HBOS could come crashing down.
As far as the UK economy is concerned, HBOS is too big too fail. Mr. Brown is keenly aware that it is the country's biggest supplier of mortgages. Last year, it accounted for 20 percent of the market. According to bloomberg, Brom had a "conversation" with Lloyds TSB Group Plc Chairman Victor Blank earlier this week. The BBC also report that there are merger talks.
Lets hope that these talks conclude by tomorrow morning. The UK banking system can not cope with another bank run.