The Detox Team

The remaining threat to that upward momentum comes from the question of exactly how toxic is the HBOS component - and who are the bright people charged with negotiating the fall-out? Are we facing a full meltdown of major corporate assets in the teeth of recession - or are the fuel rods of debt now safely immersed in a cold pool of stability?

As we head into February, the answer is that Lloyds Banking Group still has not been able to get to the bottom of the radioactive pit because, in corporate terms, the two banks are not up-close and personal yet. But the midweek rally in the Lloyds Banking Group share prices suggested relief that the identity of the workers wearing the gloves and protective suits had been announced. There appears to be confidence that they can be trusted to seek out and isolate those plutonium loans.

While the integration of Lloyds Banking Group is surging ahead with Obama-esque urgency, sources hint that Lloyds is still having difficulty getting hard information out of its new HBOS colleagues. And there are fears that some of HBOS's poorer business practices still persist.

One businesswoman who sold her company last year revealed to the Sunday Herald that when she went to her Edinburgh branch last week, the business manager encouraged her to put her £100,000 savings into banking shares rather than keep it on deposit.

"Banking shares can back go up, you know," she was told. One icy look was enough to make the banker back off.

But however inappropriate in that particular case, the HBOS bank manager has a fair point. The Sunday Herald understands that board members have urged the National Association of Pension Funds and the Association of British Insurers to encourage their members to buy bank stocks, on the grounds that the "national emergency" of a sick banking sector affects all financial services players.

"They are part of the fabric of the financial sector and ought to be playing a much more active role in rebuilding confidence," said a source. "Rather than trying to distance themselves from the banks, they should be helping to underpin the sector."

Lloyds Banking Group's shares mirrored Barclays' revival last week. The latter rose sharply when the bank repeated that it will not need to turn to the government or investors for more capital. Chief executive John Varley said that the bank had made a good start for 2009, and would make a profit from buying the distressed Lehman Brothers' US operations.

A note from Citigroup analyst Tom Rayner, the house broker, upgraded the Lloyds Banking Group to a "buy", saying that the bank would not need to be taken into full state control. The shares soared more than 50% to over a pound, with a target price of 120p. The bank finished the week at 90.7p.

But what is going on deep inside the Lloyds Banking Group? And how justified are the fears that there are lot of toxic debts still to be uncovered? Until Lloyds Banking Group comes out with its results during the banking reporting season in mid-February, the market won't truly believe what group chief exectuive Eric Daniels and his team are attempting to do. But if, by the summer, there is discernible progress in paying back the UK government's loans and preference shares, it is likely the ordinary shares will recover significantly.

The great unknown is what will happen in the UK economy. Further impairment will mean massive job losses and company failures. The government's decision to pump money into the car industry is a typical example. If this critical supply chain is left high and dry then more good companies will fold.

But Lloyds TSB prided itself on being a "through-the-cycle" relationship bank and that is now part of the new bank's ethos. It will be the calibre of the people running the bank that will determine how quickly it recovers.

Lloyds TSB was committed to a totally different approach to banking to that of HBOS, with whom it merged in January. The HBOS corporate model used a lot of integrated finance - almost like 3i, the listed private-equity group. And last week 3i's long-standing chief executive Philip Yea departed after its shares fell by 75% in a year.

HBOS's forte was to take an equity stake, thus sharing the risk and also the upside when things went well. But in too many cases the property and construction deals, so beloved of high-flying HBOS deal-makers, have gone gangrenous, and amputation is the only cure.

Lloyds Banking Group is a new animal - but it will be left with large tracts of HBOS's old corporate lending, so what will it do? For Scottish businesses, this is a fundamental question, especially when Sir Tom Hunter's West Coast Capital, Murray International, Miller Group, Macdonald Hotels, Tulloch Homes, Gladedale, and Scarborough Muir have long enjoyed close relationships with Bank of Scotland Corporate.

The answer will be an enhanced role for LDC, Lloyds Development Capital, run by Craig Armour, which has a very small regional presence in Scotland, but which could become a major holder of banking equity stakes.

While Susan Rice is the managing director of the Lloyds Banking Group in Scotland and will oversee all retail and commercial activities and continue as the figurehead in Scotland, much of the new power-base for business and corporate is with Lloyds Banking Group's wholesale division, run out of London. An important figure will be Truett Tate, the 58-year-old American former Citigroup executive, who is director of the wholesale business. Reporting to Tate is Diana Brightmore-Armour, the CEO of corporate banking, and a significant and charismatic presence.

She once worked for Coca-Cola as a senior executive and fought off Sir Richard Branson's Virgin Cola by assembling a swat team. Alongside her is John Maltby, the managing director of commercial banking in the new group.

From the HBOS Corporate side there are still talented and untainted people who have strong relationships with major customers. The departure of Peter Cummings blew a hole in the idea of a "banker to the entrepreneurial stars", but Graeme Shankland, as managing director for specialist assets in the UK, has a wide brief in integrated finance, leverage and equity.

He is based in London with a network across the UK, while Nick Robinson, HBOS corporate managing director for commercial real estate, retains his jobs title. The departure of Adrian Grace to Aegon, after he had been at HBOS for only a short time, means that Donald Kerr might be given an extended role in Scotland. But there is still uncertainty about the next tier of appointments.

In Scotland, Manus Fullerton, the well-liked veteran Lloyds TSB Scotland banker who is due for retirement in April, has been asked to stay on to help with the integration. He will have a key job in smoothing the transition between the two styles of banking.

His number two, Mark Prentice, is highly regarded. Lloyds TSB Scotland's wholesale wing is small scale in comparison to Bank of Scotland Corporate, although the combined business will be greater than RBS, and it has some high-quality Scottish businesses including Aggreko.

There are still a number of key appointments to be confirmed in Scotland, and the bank is determined to embed a far better culture of credit and risk with people transposed from Lloyds TSB. A key part will be played by Andy Cumming, who was head of Lloyds TSB risk and is on the board of Lloyds TSB Scotland.

Lloyds TSB Scotland is keen to tell customers it's "business as usual". That's a reassuring message in troubled times, but there are likely to be many Scottish businesses anxiously awaiting the call from the new bank manager asking them to come and have a chat.

Meanwhile, the full toxic burden of HBOS is still unknown. The danger for Scotland is that lending decisions taken on big-ticket deals will ultimately be shifted to London, and all those acute sensitivities raised when the merger was approved will be swept under the carpet. The new banking leaders have a great deal more to consider than how to lend cash. Did the FSA turn a blind eye to HBOS practices? The banks continue to be pilloried because of the credit crunch, but have the UK regulators shouldered enough blame for not tackling some of the behaviour inside the UK banks? They can hardly plead ingnorance.

One example: In 2005, I wrote to the Financial Services Authority in pursuit of a story about how Halifax Bank of Scotland appeared to be using joint-venture companies and off-balance sheet lending to affect the true picture of the assets on their balance sheet.

The matter stemmed from the affairs of Gavin Masterton, pictured below, the retired managing director of Bank of Scotland, and the debts of a company called Stadia Investment Group. In my view, the case required a full and public investigation with strong recommendation on whether such practices were legitimate for a listed company.

I asked the FSA to investigate. In February 2005, after several letters and emails, the FSA replied: "The Financial Services and Market Act 2000 prevented us from disclosing the nature of our enquiries with individual firms and whether any regulatory action has been taken arising from a particular complaint."

The FSA hid behind the rules and nothing appears to have been done, when stronger direction on such strategies might well have prevented HBOS's meltdown - and given investors a clearer picture of HBOS's liabilities.

The FSA said then: "Confidentiality is necessary to effectively meet our objective of consumer protection. If it were not in place, regulated firms would have no incentive to co-operate with the FSA. This in turn would lead to an adversarial system of regulation, which would harm investor protection. It is a result of this that section 348 of FSMA makes it a criminal offence to disclose information."

So we still have no idea whether the FSA pursued this enquiry - or simply chucked it in the bin. The message from the FSA in 2005 was: "Don't bother us".

This week I wrote to the FSA again. I was asking for proper answers to those serious questions. Their response to this might give us a clue as to whether the body might hand out clearer guidelines for the future. This would be a fair deal for investors.