The Dow Jones hits its lowest level for 12 years this week, as stocks on the North American markets continued to tumble. It appears that even President Barack Obama couldn’t turn the mood, with his maiden speech to Congress this week meeting thunderous applause from those present, but on the same day stocks on Wall Street slid a further 2%.

Things aren’t much better this side of the Atlantic with the news last week that RBS posted the largest loss in UK corporate history, a staggering £24bn in the red. The bank had a substantial exposure to the credit crisis and was not helped by its disastrous acquisition of Dutch ank ABN Amro and its US operations near the top of the market.

RBS confirmed it aims to cut £2.5bn from its cost base and centre its business on the UK, effectively retrenching from its years of corporate empire building overseas. This is likely to involve a further 20,000 job cuts across the group. The bank is already nearly 70% owned by the tax
payer and this is likely to rise to over 75% after Thursday’s announcement that RBS is going to tap the tax payer for a further £25.5bn. This did nothing to stop the persistent rumours that more banks could be nationalised.

The continuing weakness in the banking sector is the major issue for UK investors. The UK economy is founded upon the banking system which now looks increasingly fragile. Basically, companies need debt to grow and working capital facilities to operate on a day-to-day basis. Also individuals need finance to buy homes and cars, and to manage their finances.

The scarcity of credit looks likely to persist with the ongoing and as yet unquantified problems still facing the banking system. The government is clearly struggling to manage the situation and many question its level of influence despite its significant holdings in most of our major high-street banks. The announcement that Sir Fred Goodwin, the former chief executive of RBS, is to receive a £650,000 a year pension seemed to fly in the face of the government’s apparent crackdown on City excess.

The banking system still needs to be sorted out; until then any upturn in the market would seem premature.

Michael Vassallo, equities analyst, Brewin Dolphin Investment Banking