London - A year-and-a-half ago, Britons thought the country's first bank run in more than a century and the subsequent nationalisation of a mid-market mortgage lender was the worst the financial crisis could get.
Since then, they've watched the government spend billions of taxpayer pounds (dollars) to stop the entire sector collapsing, prompting a round of belated apologies from bank executives stripped of their bonuses and positions.
And the aftershocks are expected to keep on coming this week for Britain's once-solid banking system, with the country's second-largest bank, Royal Bank of Scotland, expected to slash jobs and announce plans to sell overseas businesses when it unveils its full-year earnings.
That news comes as the government puts the final touches on a second industry bailout package that includes an insurance programme to buy up institutions' toxic assets, allowing them to start lending normally again. The government is also likely to approve yet another drastic measure - the Bank of England's proposal to begin so-called quantitative easing, effectively printing money - within days.
The question is, when will all the tough medicine take effect?
"Just possibly, events that will unfold in the UK this week could actually signal a small but nevertheless important sentiment reversal for our banks," said Howard Wheeldon, a senior strategist at BGC Partners.
The renewed attempt to free up lending comes as US regulators said they will launch a revamped programme to shore up America's troubled banks that includes the option of increasing government ownership in financial institutions.
Restore confidence
British Prime Minister Gordon Brown and his Treasury chief Alistair Darling are still hammering out the details of its proposed asset protection scheme, under which banks will put billions of pounds worth of assets into a vehicle that will ensure they are only liable for a proportion of any losses.
The government hopes that the insurance plan will restore confidence in the sector, restarting lending that was curtailed by the global credit squeeze.
"The challenge that we are facing is a challenge faced in every country and that is to make sure that the banks start lending again to the people of this country, to businesses and to home owners," Brown told reporters on Monday, after the government announced that nationalised mortgage lender Northern Rock will revive its home loan business.
Analysts said the announcement that the lender, the victim of the bank run, will make £5bn in new mortgage lending available this year, and between £3bn and £9bn in subsequent years, was a modest but positive step toward reviving normal lending.
Analysts expect a detailed announcement on the asset protection programme to pre-empt or coincide with the earnings statement from the partly nationalised Royal Bank of Scotland on Thursday.
RBS, which will be 68% owned by the government once it has completed a rights issue in the next few weeks, has already said it may post a loss of as much as £28bn for last year, the biggest ever for a British company.
With the huge loss already anticipated, RBS shares rose more than 20% on Monday in anticipation that the bank will announce a major restructuring plan alongside the earnings report.
Return of prudent banking
Reports have suggested that the bank will hive off large parts of its international operations to split its assets between core "good" ones to be held long-term and "bad" ones to be sold off in the coming years.
The plan, which the bank has declined to comment on ahead of Thursday, could result in it shedding 20 000 jobs, or 10% of its work force.
The RBS earnings update will be followed a day later by Lloyds Banking Group, which also already flagged up much of the bad news to the markets. Its revelation earlier this month that its HBOS subsidiary would likely post an annual pretax loss of around £10bn sent its stock plummeting 35%.
"Investors will be hoping that no further negative surprises are in store," said Hargreaves Lansdown banking analyst Keith Bowman.
Once the immediate earnings reports are out of the way, the focus will return to whether the government's latest efforts to shore up sentiment in the sector will succeed.
After meeting with European leaders in Berlin over the weekend, Brown has called for a return to more prudent banking, a comment seen by some as a tacit admission that his government did not do enough to restrain lax lending standards during the economic boom of the last decade.
To determine the viability of the government's next steps, analysts say they need to see more detail on the asset protection package.
"Much of what they have done, particularly forced recapitalisation, has undoubtedly been good - often well thought out and by nature, quite radical too," said Wheeldon. "But as has become the custom of our government, though sounding good from a marketing viewpoint, much of it ended up being very badly delivered."
- AP