The row between Lloyds Banking Group and the Treasury over how much the bank must pay to insure some £250 billion of toxic debts certainly put the City on edge. But equally concerning was the detail behind the losses.

The £10.8 billion deficit at basket case HBOS was shocking, if not surprising, given last month's profits warning, while even the more conservative and often boring Lloyds TSB saw its profits crash 80% to £807 million.

That Lloyds TSB made a profit at all is commendable, particularly given yesterday's massive £24.1 billion loss at Royal Bank of Scotland. But it means little now it owns HBOS, and the immediate future for the combined bank looks bleak.

Bad debts at HBOS rose fivefold in 2008, soaring from £2 billion to £9.9 billion, and are expected to get an awful lot worse. At Lloyds TSB they swelled from £1.7 billion to £3 billion. The bulk of the bad debt at HBOS came from the corporate lending arm of Bank of Scotland, which lost £6.8 billion after Daniels and co took a more conservative view of the book built by now departed “banker to the stars” Peter Cummings.

Bad debts as a proportion of loans in the corporate business have jumped from 3.45% to 11.9% in just six months. This is the legacy left by Cummings, who piled into hard-hit sectors such as commercial property and housebuilding, and his reputation lies in tatters along with those of his former chief executives Andy Hornby and Sir James Crosby.

Meanwhile, at the home loans business, arrears soared and one in six HBOS mortgage customers were in negative equity at the end of last year. Daniels explained only 70% of Halifax mortgage lending was of “Lloyds TSB standard”. The other 30% was to risky borrowers on subprime and self-certification deals.

What the Square Mile says

Jonathan Jackson, Killik & Co: “There will be some disappointment over the lack of an announcement on the Government's Asset Protection Scheme. We would expect the group to participate in the scheme. We reiterate our view that the shares will remain volatile and that any investment is very high risk.”

Richard Hunter, Hargreaves Lansdown: “The lack of detail on Lloyds' likely use of the Asset Protection Scheme is slightly disappointing, and there are few crumbs of comfort in the results. The numbers take the wind out of the UK banking sector's sails after yesterday's gains.”

Howard Wheeldon, BGC Partners: “Investors may justifiably feel that Lloyds' management lost the plot in buying HBOS and the corresponding additional risk but given time, if it really can be proved that it bought these assets at a significant discount to book value, shareholders may well be forced to change their minds. Of course, it could still go the other way.”