Talk of Brown having saved the economy looks premature, writes Fiona Walsh

ON A GLOOMY February afternoon in 2008, Newcastle-based Northern Rock became the first British company to be nationalised since the 1970s.

It was a dramatic moment - for the City of London, for the bank's 6,000 employees, and for the British government, which had hurriedly cobbled together the rescue plan after it became clear that the once high-flying mortgage lender was close to collapse.

At the time, and it's hard to believe that it was just 10 months ago, there was still a belief that Northern Rock would be a one-off; a special case of a regional bank that had been brought to its knees by an arrogant and overambitious management team. But, by the end of the year, the face of banking in Britain had changed for ever, as the government was forced into a multi-billion pound bailout of some of the best-known names in the business - Halifax Bank of Scotland (HBOS), Lloyds TSB and Royal Bank of Scotland (RBS).

Aided by some hefty and deeply unpopular cash calls on shareholders, the banks had initially hoped they would be able to withstand the continuing credit crunch. But, despite a series of co-ordinated global interest rate cuts, funds on the wholesale money markets proved virtually impossible to access.

Lending between the banks ground to a halt, with each fearful that the other was about to be brought down by toxic loans. Consumers and businesses, both large and small, also found themselves unable to raise funds as the knock-on effects of the money market paralysis cascaded through the system.

The defining moment for the banking sector in Britain - and the rest of the world - came in mid-September. The shock came from across the Atlantic, with the collapse of the US investment bank Lehman Brothers.

The fall-out from the Lehman collapse marked a sea-change in the scale of the crisis, ending any hopes that the banking system could survive without huge injections of cash.

Bank shares plummeted, with prices swinging wildly amid rumours of which one would be the next to go. Short-sellers became public hate figures, blamed for creating runs on the shares in RBS and HBOS, among others. The City watchdog, the Financial Services Authority, stepped in to ban the short-sellers - but the frenzied price swings continued.

Just days after the collapse of Lehman Brothers, Lloyds TSB stepped in with a £12 billion rescue takeover bid for HBOS, a deal that creates a banking giant accounting for almost one-third of the UK's savings and mortgages markets but will result in many thousands of job losses.

The move had been brokered by Gordon Brown himself; at a drinks party in the City of London earlier that week the prime minister assured the Lloyds TSB chairman, Sir Victor Blank, that the takeover would be waved through by the competition authorities, if the new banking giant promised to step up lending to businesses and housebuyers.

A fortnight after the Lloyds deal was launched, the government stepped in to nationalise Bradford Bingley, the last of the former building societies that had floated on the stock market in happier times.

A week later, the government launched its banking bailout plan, injecting £37 billion of taxpayers' cash into the sector, part-nationalising Lloyds TSB, HBOS and RBS. In return, the banks would have to agree to curb bonuses, suspend dividend payments and start lending again, and at reasonable rates.

The bailout plan, based on the Swedish government's banking sector rescue in the early 1990s, was copied around the world and Brown was hailed, in the words of Nobel prize-winning economist Paul Krugman as the man who just might have saved the world's financial system.

But as a traumatic year draws to a close, any talk of the financial system having been saved looks horribly premature. The banks are still refusing to lend, their bad debts are rising by the day and their shares are still sliding. Full nationalisation of the sector remains a distinct possibility.

As the recession deepens, and unemployment queues lengthen, it's a pretty safe bet that, for the shattered banking sector, things will get worse - and possibly very much worse - before they get better.

Fiona Walsh writes for the Guardiannewspaper in London