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Who had the credibility problem here – Halifax Bank of Scotland or the UK’s Financial Services Authority? The answer, sadly, is both. The FSA maintained that HBOS was funding its business in a “satisfactory” way. But satisfactory to whom?

Certainly not shareholders, who have watched in horror as the market capitalisation of the UK’s biggest mortgage lender has fallen from a peak of £44bn in February 2007 to today’s £8bn. And certainly not lenders in the term funding markets, whose reluctance to roll over debt of a maturity of greater than two years – the lifeblood of any bank – left HBOS dangerously dependent on short-term financing. In this respect, it is not unlike pre-nationalisation Northern Rock.

The partial recovery in HBOS’s shares – they were at one point down more than 40 per cent – had nothing to do with the bromides from the FSA and everything to do with hopes of a takeover by Lloyds TSB – confirmed last night. In much the same way that Merrill Lynch’s John Thain swallowed his pride and sold the shop to Bank of America at the weekend, HBOS’s Andy Hornby clutched at any lifeline he could find. Although there was no sign of a Northern Rock-style bank run, the longer HBOS remained the lead item on the news the greater the risk such scenes were repeated across the UK.

Given that HBOS takes one pound in every five saved in the UK, the UK government was willing to do everything possible to avert such an outcome. If that means allowing the Black Horse a dominant position in UK retail banking – the combined group would, for example, control almost 30 per cent of the UK mortgage market – so be it. Securing a waiver from competition regulators for a private sector rescue of HBOS is infinitely preferable to another bungled nationalisation that would accentuate the moral hazard already welling up in the financial system.

Lloyds TSB, the only UK bank rated triple A by Moody’s, has the balance sheet to step up to the mark and treble its exposure to the dismal UK housing market. Many others would not, even if they could

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