No longer is state ownership the unpalatable solution for wayward individuals like Northern Rock and Bradford & Bingley, but a logical fix for the whole industry.
The true picture of last week's £500 billion bail-out is now emerging. The Government is prepared to take majority ownership of the country's four largest lenders – Barclays, HBOS, Lloyds TSB, and Royal Bank of Scotland – if necessary.
The banks' biggest investors would normally be expected to stump up the cash but, after the stock market rout of the past week, they are – unsurprisingly – reluctant to throw good money after bad. A small stake in a largely state-owned institution, that has a greater eye on taxpayer interest than the profit motive, would also be a large deterrent.
For the Government, though, it is imperative to move now. The money markets, which Credit Suisse notes have "supported about 40 per cent of all growth in customer loans" in the past eight years, are shut. If they don't open up, "we are guaranteed a 1930s-style depression", according to Mark Thomas, an analyst at Keefe, Bruyette & Woods. In other words, years of credit rationing loom.
Despite the rave reviews it received, the Government's ambitious £500 billion rescue plan for the industry is simply not working. The money markets tightened up even more on Thursday and Friday after it was unveiled. To give the plan life, policy makers are now acutely aware they need to administer the most awful medicine.
Banks will have to take billions of pounds more in writedowns on their "toxic", sub-prime related debts. Each provision erodes capital, the financial cushion on banks' books with which to absorb losses incurred by bad debts. Only when the lenders have restored and rebuilt that capital with huge new cash injections do the markets stand a chance of recovering their belief that these institutions will not go bust.
As one institutional investor explained: "Banks that doesn't think they need massive amounts of help are morons. It's a bit like standing in front of a tidal wave and saying I'm OK because I've got my swimming trunks on."
He added: "There is liquidity out there - it's just in the wrong place." Without confidence in the lending institutions, though, the liquidity will stay in the wrong place and markets will remain seized shut to Britain's banks.
Under the bail-out as proposed on Wednesday, the £25 billion recapitalisation would have been achieved largely through the issue of preference shares, a kind of debt that offers taxpayers' better protection than straight equity.
Since then, it has become abundantly clear that the banks need principle equity – in other words cash for part-ownership – to meet regulatory demands and to restore desperately-needed confidence. Preference shares simply won't cut it any longer. As a result, the taxpayer may face the prospect of becoming a majority owner in the banks if the existing shareholders stay away.
For Gordon Brown, turning the UK solution into a global bail-out is vital. The money markets are now international, so lack of faith in other institutions will continue to cause problems. But, looking provincially, Britain's problems are more acute than others.
The combined assets of Britain's banks are five times the size of UK gross domestic product. Only Iceland, Ireland, Malta and Cyprus have a higher ratio in Europe, according to investment bank UBS. Our economy is more geared to the success of our banks than most of the rest.
Moreover, some £550 billion of our customer loans are funded through the money markets, according to Credit Suisse. Fixing the situation is more critical than any ideology now. Part-nationalisation, if it recapitalises the banks, is the practical way of restoring depleted confidence. If that does not work, full nationalisation is the only route left.
