The shock of the effective nationalisation of Scotland's two biggest banks — HBOS and RBS — left business executives stunned and struggling to see how its financial services industry would recover.

The humiliation of Scotland's bankers having to ask the UK Government to inject £20 billion into RBS and £17 billion into the soon-to-be-merged HBOS and Lloyds TSB was something that few wished to contemplate.

Jo Elliot, deputy chief executive of Quayle Munro, an Edinburgh-based investment bank specialising in project finance, said: “These are both 300-year-old institutions and it doesn't feel good to have the Government now as a part-owner of them, but the alternative is much worse.”

Some executives expressed hope that the intervention will cool the fevered financial market. Mr Elliot said: “The important element is the removal of the threat which seemed to be looming last week that the banks would simply freeze and not be able to do anything at all.”

He said that he had been discussing a project requiring finance with a smaller financial institution last week and that the cost of the money being offered had shot up while the availablility of money had shrunk. “That is a very real threat to the real economy,” he said.

Yet while yesterday's part-nationalisation put political pressure on the two banks to increase mortgage and small business lending, the prospect of recession is deterring people from borrowing money. RBS executives said yesterday that the current problem was not a lack of supply of money to lend, but a lack of demand.

Executives were also assessing how much damage the financial package had done to Scotland's international reputation. Ron Hewitt, chief executive of the Edinburgh Chamber of Commerce, said that it was important to recognise that both banks and the relationships of trust built up over many years were still in place.

Owen Kelly, chief executive of Scottish Financial Enterprise, said: “Within the context of what is happening, the humbling of Wall Street for example, and the severity of impacts on the whole of the Icelandic economy, I think we need to keep the impact in Scotland in proportion.”

Willie Watt, chief executive of Martin Currie Investment Management, said: “I have every confidence that the quality of people working in the sector in banking, insurance and investment management will work hard and effectively to maximise the opportunities and successfully manage the risks that these times present us with.”

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