It is a scenario that was never meant to happen again after the financial catastrophe of 2008. Since the crash, governments and regulators have forced banks to raise massive amounts of capital to ensure they could survive another crisis without the need for any further taxpayer funded bail-outs.

Banks have also been forced to rein in the kinds of risky trading and lending that many blame for the financial crisis. But as shares this week fell to a three-year low with bank stocks particularly badly hit some are questioning whether we could be on the brink of a new banking crisis.

In the six weeks since the start of the year share prices in the world’s largest banks have plunged. Deutsche Bank, Germany’s largest bank, has so far been the worst casualty with its stocks crashing 42 per cent after posting its first loss, of €6.7 billion, since the 2008 crisis.

Meanwhile, shares in Italy’s Unicredit have plummeted 40 per cent, Credit Suisse is down 37 per cent, France’s Societe Generale have lost 31 per cent of their value while UBS is down 29 per cent and Barclays has lost around 28 per cent. Overall, the Europe-wide Stoxx 600 banking index is down 27 per cent.

On Wall Street, shares in Bank of America have plunged by more than 28 per cent, Citigroup is down 27 per cent and Morgan Stanley has shed almost 25 per cent.

The rout has extended to the UK where, in a major blow to pension savers and investors, the country’s largest banks have had £40 billion wiped off their value since the beginning of the year, with shares in HSBC down 20 per cent and Standard Chartered down 30 per cent.

Last month state-owned Royal Bank of Scotland warned of a “cataclysmic year” ahead for investors. When the UK banks start publishing their 2015 accounts in the coming weeks the results are expected to be dire.

As worries about a deflationary spiral and global slowdown pushed down borrowing costs in the UK last week to their lowest recorded levels, many bond traders now believe that UK interest rates – contrary to recent speculation that they would rise in 2016 – will instead have to be cut.

The Herald:

Perhaps the biggest difference between now and eight years ago is that the 2008 crash was initially triggered by the single issue of dodgy lending by banks into sub-prime mortgages.

This involved the little-understood and technical issue of collateralised debt obligations (CDOs), where highly risky lending was sliced and diced into highly toxic investment vehicles which contributed to the financial meltdown.

This time round the fears that are spooking markets are more varied and straightforward: a slowdown in growth in China and emerging markets, falling energy prices and, over the last week, increasing fears that the European Central Bank could follow the example of non-Eurozone European central banks and cut interest rates further into negative territory.

Ian Fraser, whose book Shredded is an authoritative account of the collapse of Royal Bank of Scotland, believes that the reforms of the banking sector imposed by legislators and regulators have so far been inadequate.

“The bank bail-outs during the financial crash should have been conditional on harsher reforms,” he said. “There are still some serious issues around derivatives that have not been addressed.”

Among the new requirements imposed on the sector are an increase in the equity capital held by banks and liquidity rules designed to enable banks to withstand the loss of short-term wholesale funding.

A new type of bond, known as contingent capital or CoCos, designed to force bondholders rather taxpayers to absorb bank losses are now causing problems for Deutsche Bank, Santander and UniCredit, amid questions about how these new hybrid bonds will be treated in the future.

Colin McLean, managing director of Edinburgh-based SVM Asset Management, believes that not enough has been done since 2008 to separate high street retail banking from riskier investment banking.

Despite progress at state-owned RBS, McLean says, Barclays continues to use the solidity of its High Street operations to underwrite its investment banking,

“There should have been more reform in this area but there has been political pressure not to,” he says.

McLean believes that the best progress towards bank recapitalisation has been in the US, where banks like JP Morgan are now in a stronger place than eight years ago but that progress in the UK on de-leveraging has been slower.

Nevertheless, he believes, banks such as RBS are now in a stronger position than many banks in the eurozone which continue to operate very thin capital buffers.

A second financial crisis is therefore unlikely as banks are better capitalised than in 2008, but McLean remains concerned that a growing risk of deflation could lead to decreased productive capital investment with a consequent negative impact on wages.

McLean believes that plans being drawn up by the European Commission for a Eurozone banking union, designed to increase the stability of the sector, will have to address continuing sovereign risks. “They have not yet disentangled sovereign risks from banks’ own balance sheet,” he says. “A banking union is a good idea if it can be matched by political union.”

David Ridland, manager of the Glasgow-based Castlebay UK Equity Fund, whose own company shuns investing in bank shares, says that single digit or at best low double digit returns in the sector make them unattractive for investors.

Ridland believes that legislation to crack down on bankers’ bonuses – which many believe contributed to the 2008 crash by encouraging reckless “casino” banking – was too weak and that bonuses should be spread over a longer time period, which would allow bonuses to be reduced or clawed back when it could be shown that a banker’s actions had destroyed value.

“Banks have become increasingly complex and, during the financial crisis, the majority of bank chief executives didn’t know what was going on in all parts of their banks,” he says. “I would suggest that that is still the case.”

Like McLean, Ridland believes that legislation aiming to split retail banking from riskier investment banking has been too slow in coming and is not strong enough.

Despite the legislative and regulative changes imposed in the years since the crisis, Ridland believes that banks’ balance sheets are still far too large and the falling bank share prices since the beginning of the year show that this is undermining confidence in the sector.

“The ability of banks to absorb losses if there is another downturn is questionable,” he says. “There are now new capital buffers but only time will tell whether they are large enough.”