The collapse of Bear Stearns had a predictable impact on stock markets across the world yesterday. But few suffered as badly as the UK market.

The FTSE 100 dived by more than 200 points to close at 5,414. Meanwhile, the pound had its worst day since “Black Wednesday”, when it was thrown out of the exchange-rate mechanism. It shed almost 2% against a basket of other currencies, to end the day at its lowest level since January 1997.

In fact, the pound even fell against the dollar, unlike almost every other major currency. The horrible reality is that the markets think that the UK is in almost as much trouble as the US…

The Dow Jones actually managed to end higher yesterday, up 20-odd points by the close, as traders gradually calmed down after no other banks went to the wall. Fear had centred on Lehman Brothers, which has a similar business model to Bear Stearns, but it seems that Wall Street rallied round the group to avoid a run on the bank igniting – for now at least.

Of course, it’s saying something when you can argue that Lehman investors might have been relieved that the company’s stock ‘only’ closed down by around 20%. Other financials such as Man Group spin-off MF Global dived by more than 50%, on little more than fear and rumour. But the real carnage was happening this side of the Atlantic, here in the UK.

Which UK banks are the biggest cause for concern? British banks took a pounding once again, with HBOS, Britain’s biggest mortgage lender, the top faller, down 13%. As Alex Potter of Collins Stewart told The Telegraph: “If people can pull liquidity out of Bear [Stearns] at the rate they did, all bets are off on the rest of the banking sector.” The main reason people are worried about HBOS in particular is that it has the highest ratio of money raised from wholesale markets, compared to customer deposits, at 177%, according to The Telegraph.

That still compares very favourably to Northern Rock, which was on 345%. But HBOS also has £7.1bn of exposure to Alt-A mortgages in the US, which are just above sub-prime. If the US property market continues to weaken – as seems very likely – those assets are vulnerable to some nasty potential write-downs.

But HBOS is far from being the only bank that investors are worried about. It wasn’t thought to be among the desperate lenders clamouring for money from the Bank of England yesterday, for one thing. The Bank of England auctioned off £5bn of short-term loans at 5.25% yesterday, but banks requested almost five times that amount, £23.6bn. The move came as the inter-bank lending rate spiked up to 5.59%, in the largest rise in three months.

Incidentally, if you’re worried that the bank you hold an account with could be at risk, you can read James Ferguson’s article on where the safest places to park your savings are here: How to spot the riskiest banks (http://www.moneyweek.com/file/41437/credit-default-swaps-how-to-spot-the-riskiest-banks.html)

The big borrowing squeeze

All of this means that lending for the man and woman on the street isn’t going to get any cheaper. If banks can’t get the money they need at a rate they can afford, then what hope is there for the likes of you and me?

Life is clearly already getting much harder for entrepreneurs in the UK. Barclays reckons that half a million businesses closed their doors for good last year. That’s up 8% on 2006, and meant a closure rate of 17% of all businesses with bank accounts. The last time that sort of rate was reached was during the last recession in 1991-1993.

Personal loan rates have risen from an average of 14.4% on a £1,000 loan before the crunch, as The Times puts it, to 18.9% now. And mortgage providers are pulling their products left, right and centre. Scottish Widows has pulled all its two and three year fixed rate deals, and all of its buy-to-let range, says The Telegraph, while Halifax jacked up the rates on some of its tracker deals by as much as 0.3 percentage points. It makes a mockery of all the feeble articles being printed in the weekend property supplements about ‘a spring recovery’ in the property market.

Banks in the UK are already suffering. What will happen when the UK housing crash gets fully underway? No wonder traders are bailing out of sterling.