ALEX BRUMMER: Never mind Wall Street, we've got our own disaster

The disappearance of B&B as a publicly-quoted bank would mean that all those former building societies which became banks in the 1990s have lost their independence in the face of the hurricane sweeping through the financial markets.

Whatever the outcome of the $700billion bailout scheme for the U.S. financial system, it is clear that Britain has its own banking disaster to deal with.

Beleagured: Bradford & Bingley has lost 95% of its value in a year

The high street banks have become so suspicious of each other’s safety that they are refusing to lend to each other and would rather place deposits with the Bank of England.

The Bank’s governor Mervyn King, who has been criticised for being behind the curve during the credit crunch, has moved dramatically to make sure that the cash which lubricates the banking system and the economy does not dry up, with a £62billion programme of emergency loans.

This is in addition to the Bank’s special liquidity scheme under which mortgage lenders have swapped up to £100billion of illiquid assets for bonds – the equivalent of cash.

The Government has been deliberating over two possible approaches to dealing with the instability in British banking.

One would be to follow the Americans and establish a parallel fund which would take on the toxic assets of UK banks, thereby ensuring they lend to each other again.

This kind of approach is thought to be favoured by Gordon Brown, who thinks that the banking crisis is a global problem which needs transnational solutions.

But the ‘tripartite’ authorities of the Treasury, the Bank of England and the Financial Services Authority, with Alistair Darling in the driving seat, would seem to prefer a lower-key case-by-case approach.

This style of rescue has already seen Alliance & Leicester merged with Santander, Northern Rock nationalised, Lloyds TSB take control of Halifax Bank of Scotland and now the future of B&B hanging in the balance.

One consequence of the dramatic events in the financial markets – Washington Mutual collapsed in the U.S. in the early hours of yesterday and there has been a run on the shares of the Belgian-Dutch bank Fortis – has been a change of thinking on both sides of the Atlantic on interest rates.

The central banks appear to take the view that if official base rates can be brought down, this might nudge down rates in the interbank markets, where banks lend to each other, and eventually feed through to consumers and businesses.

Here in Britain several members of the interest-rate-setting Monetary Policy Committee have hinted in recent days of a change in heart over interest rates as recession and the credit crunch loom larger than inflation.

Among the ‘hawks’ who have hinted at changing their minds are the deputy governor Sir John Gieve and the business economists Kate Barker and Andrew Sentance – who until now have been committed to holding firm.

City economists are also switching their interest-rate predictions with Michael Saunders of Citigroup issuing a note saying he now expects the first interest-rate cut as soon as next month or November.

What is clear is that even if all the American plan receives the go-ahead and stability is returned to the banking system, the shocking events of the last month have delivered a huge psychological blow to consumers and businesses.

This means that by the end of this year almost all the Western economies will be in or heading for a slump.