Open season is fuelled by genuine fear

The catalyst for this collapse into the unknown was the fall of Lehman Brothers at the weekend. That started an open season on banks, driven by the short sellers but also fuelled by genuine concerns about the scale of their losses from mortgage defaults. This in turn has opened a Pandora's box of worries about the range of techniques used by banks to boost their profits, such as taking loans and converting them into complex financial instruments.

But if the defaults have been going on for more than a year why has the crisis only blown up now?

Again, it did seem as if the banks were beginning to get a handle on the scale of their losses. By the middle of this year they had made about $500billion of write-downs and raised $200billion in fresh capital. But it has not been enough. The losses keep piling up as values of debt have fallen. When Lehman Brothers fell and the US government failed to step in to protect it, the markets started looking for the next weakest players, including AIG, HBOS and now Morgan Stanley and Goldman Sachs.

Where does this leave other banks?

This is uncharted territory, so no one knows. The biggest retail banks such as HBOS will fall into the "too big to fail" category and will be protected by governments. There will also be a wave of mergers to create bigger, stronger banks. For the surviving investment banks, even the mighty Goldman Sachs, it would appear the days of independence are over.

When will this stop?

It is very hard to say. There are no recent precedents. The longer the banking crisis goes on, the more damage it does to the economy and the bigger the credit losses are for banks. Secondly banks forced into a fire sale of assets such as mortgage-backed bonds are further dragging down asset prices.

Can the Government stop it?

Western central banks have already flooded the system with liquidity to ensure banks can get their hands on funds. But they cannot address investor fear or magic away the banks' losses. Some analysts believe the US will be forced to nationalise parts of its financial system to save it - just as it did with AIG. But the implications for national finances and the taxpayer are profound. The British Government does not have the financial firepower to do a series of Northern Rocks.