UK taxpayers face bank losses of £28bn

Taxpayers were nursing £28bn of losses on their stakes in Lloyds Banking Group and Royal Bank of Scotland last night, as a torrid week for stock markets – and banking shares in particular – finally came to an end.

As RBS wrapped up a broadly disappointing week of bank results yesterday by announcing a dive into the red for the first half of the year, the taxpayer was left with a £19.7bn loss on its shares in the group.

RBS's £794m loss came a day after Lloyds revealed its own swing into deficit, announcing a £3.2bn first-half loss and contributing to a share price decline that meant taxpayers were £8.3bn out of pocket last night.

The Government owns 41 per cent of Lloyds and 83 per cent of RBS, after bailing them out with £20bn and £45bn respectively.

But Lloyds and RBS were not the only banks to suffer last week, as concerns that the European and US debt crises could drag down the global economy took their toll on banks across the world. In a sign of just how panicky the markets are, RBS's shares dived by an astonishing 20 per cent yesterday morning, before recovering some ground, to end the week down 21 per cent.

Banking shareholders are right to be worried. The chance that the eurozone debt crisis will spiral out of control certainly looks more likely than it did a week ago, with potentially disastrous consequences for the economy as the loss of confidence that hit Greece, Portugal and Ireland spreads to Italy, Spain and possibly Belgium. At the same time, a consensus is forming that last weekend's 11th-hour deal to raise the US debt ceiling has only kicked the can down the road and will continue to haunt the recovery of the world's biggest economy.

However, analysts believe that last week's banking share price declines may well have been overdone. The banks are in much better shape to withstand shocks to their balance sheets than they were before the financial crisis began, having built up their capital reserves and the proportion of them which are held in liquid assets such as government bonds. They have also written down a large portion of their loans, with RBS announcing yesterday, for example, that it wrote down its Greek government bond holdings by £733m.

If the eurozone and US sovereign debt crises remain primarily a debt issue, UK banks should be able to weather the storm. But if the debt crisis feeds through into a broader loss of confidence there is a significant risk that it will precipitate a deep, double-dip, recession that will badly affect the economy.