AFTER much heated debate and one failed attempt, US Treasury secretary Henry Paulson will have breathed a sigh of relief on Friday night when politicians finally gave his financial rescue package the thumbs-up.

On this side of the Atlantic, Chancellor Alistair Darling and Bank of England governor Mervyn King will be desperately hoping the injection of liquidity into markets will give a much-needed boost to struggling financial institutions in Britain.

Such is the importance being placed on the bailout package that Paulson, the towering former chief executive of investment giant Goldman Sachs, sank to his knees to beg Congress to agree to the multibillion-dollar deal at one point during the negotiations. Without it, the fear was there would be a repeat of the Great Depression of the 1930s.

The package is expected to lead to a rally in global stock markets this week and help kick-start recovery in beleaguered economies, including the UK.

So what next for the UK financial sector?

Throughout the credit crunch, King and Darling have failed to see eye to eye on the level of state intervention required to stop the crisis getting any worse. While their clashes may not have not generated the worldwide attention given to Barack Obama and John McCain, consumers and business leaders across the UK will want to know what they will do to prevent another financial meltdown.

Commentators are questioning King's position at the head of Britain's central bank, given his reluctance to cut interest rates to boost the economy and to back Darling's calls for more action.

There are demands for an end to the tripartite system of regulation – involving the BoE, the Treasury and the FSA – to give sole responsibility to one body. Corporate governance has also done little to prevent the failure of banks, including the once mighty HBOS, so it may be time to examine the role of non-executive directors.

And the lending strategy of banks is likely to change beyond recognition after the current crisis, now the housing market bubble has burst.

So, what shape will financial markets take now that the boom years are over?

REGULATION
The credit crunch has proved to be the first big test for tripartite regulation since it was introduced in 1997. The general consensus is that it has failed because the three parties did not communicate or shoulder their responsibilities.

Geoff Tresman, chairman of Punter Southall Financial Management, says: "The Treasury, FSA and BoE seem to think one of the other two is doing the job and this has contributed to the failure of banks, most notably Northern Rock."

Rather than start from scratch, Tresman wants sole responsibility given to the FSA or the Bank of England, rather than the Government, as it changes every three to four years.

If the FSA is handed the power, it will have to address criticism that its staff do not have a deep enough knowledge of the financial services industry to police it. The solution could lie with the thousands of bankers who have lost their jobs.

"There will be a lot of desperate bankers looking for work now, so it could be a case of poacher turned gamekeeper," says Tresman.

The idea of the FSA as regulator and BoE as unofficial lender of last resort has not worked, according to Ruthven Gemmell, partner with law firm Murray Beith Murray. The absence of a limit on inter-bank exposure has caused "contagion" from the "toxic assets" being transacted between institutions. He wants the level of risk being taken on by banks to be more closely examined in future. Ken Taylor, director of Mackenzie Taylor Wealth Management, says: "The days of banks parcelling mortgages and selling them on are seriously reduced, so we will see less lending with tighter standards. This is no bad thing, in my view."

He predicts a return to responsible, affordable credit structures.

"I remember the heady 80s and the obscene profits enjoyed by too many in the City, followed swiftly by the property crash. This saw the 90s being more subdued, but obviously going crazy by the millennium. The past five years have seen things yet again go far too well, but virtually all funded by credit. Ultimately, the debt has to be repaid. I do not believe this is a bad thing as a return to real values should actually serve most people well."

But several commentators say that over-regulation which will dampen innovation must be avoided.

Lord Jones, as he steps down from his role as trade and investment minister, has warned against such a knee-jerk reaction to the turmoil in markets. "We don't need more regulation; we need better regulation, properly enforced."

A danger is that too much red tape could cause businesses to flock to more open markets such as Dubai, Mumbai and Shanghai. Gemmell says regulation must be "fleet of foot" and the FSA must find a balance between its two objectives of consumer protection and maintaining efficient markets.

CORPORATE GOVERNANCE
Questions are being asked once again about the way in which companies are controlled and how management and shareholders work within the regulatory framework.

While corporate governance in the UK is generally seen as more robust than in more unregulated countries, it has taken some flak for the current failure in the banking system.

David Wood, executive director of technical policy at the Institute of Chartered Accountants of Scotland, says: "We have to look at what non-executive directors are doing. They need to challenge more and stick to the basic rule that if something looks too complicated then don't do it."

While there may be some requirement for non-execs to have a financial background, the main issue is for them to have the personality traits of "being dogged and speaking up", according to Wood.

"While I fully support corporate governance as it is, it could be changed to make non-execs more aware of their responsibilities and ready to challenge," he says.

WHAT NOW FOR MERVYN KING?
At the beginning of the credit crunch, Mervyn King was seen as a voice of reason and not prone to knee-jerk reaction, unlike his counterparts in the Treasury. But his response has been criticised as the economic crisis increasingly has an impact on the "man on the street".

With homeowners experiencing massive increases in monthly mortgage repayments, he has seemed over-cautious.

Tresman says: "The Monetary Policy Committee has sat on the fence for too long and Mervyn King now has a small window of opportunity to stamp his authority. Inflation is yesterday's story and we are in for more turbulent waters, which require decisive action now. So far some members of the MPC have acted like rabbits caught in the headlights."

He describes the practice of King being forced to write to the Chancellor when the inflation target is breached as "puerile" as the "real" of inflation felt by consumers is much higher and is the figure that really matters.

If the MPC wants to have any real impact, commentators say there should be a half-point cut in the interest rate on Thursday. This would be its first reduction since April, when 0.25% was knocked off, and the first 0.5% cut since November 2001, in the aftermath of 9/11.

LENDING AND HOUSING MARKET
In the boom years of spiralling house price inflation, lenders relaxed their criteria and gave large mortgages to many borrowers who could not afford the repayments. While the UK does not have a sub-prime crisis on the scale of that in the US, repossessions are increasing and the effects of liberal lending are becoming clear.

Tresman says: "The banking sector has been driven by a feeding frenzy. If you had a pulse you could get a mortgage. The fact that people were allowed to borrow such high amounts was a recipe for disaster."

We will now see a return to more old-fashioned banking practices, where people will have to prove not just their income but their capacity to repay and service the loan, according to Tresman.

David Alexander, of letting and estate agency DJ Alexander, says: "Allowing borrowers to have 125% loan to value (LTV) on a mortgage was incredibly foolish. It was effectively putting homeowners into negative equity from day one. In the future LTVs will be lower."

Rather than the regulator imposing limits on lenders, commentators believe banks will realise it is up to them to be more prudent in future.

It is not just individual consumers that will find it harder and more expensive to borrow money. Businesses are already being affected by tightening criteria. A BoE survey last week revealed that lenders aim to reduce the amount of money they lend in the coming months.

In its report, the BoE asked lenders about the past three months and their predictions for the final three months of the year. Commercial banks said they were expecting to tighten further the availability of credit for companies and home-buyers during the final three months of the year.

In its report, the BoE says: "Lenders reported that the changing economic outlook, their expectations for the housing market, and changes in their appetite for risk had contributed to the decline in credit availability."

As for the housing market, last week it became evident that Scotland is not immune from the downturn. Nationwide Building Society revealed prices declined by 5% north of the border in the three months to September, compared with 4.6% across the UK.

Alexander warns: "The lack of liquidity in the banking system has had a dramatic effect on the housing market and it will be in the doldrums for some time. If anything 2009 looks worse than 2008."

THE ECONOMY
The UK economy has ground to a standstill, although it is still to tip into a technical recession, which is defined as two consecutive quarters of negative growth. The latest data from the Office for National Statistics (ONS) showed growth was 0% in the second quarter of 2008, down from 0.3% for the first three months of the year.

Commentators are hopeful that the US bailout package will have the desired effect of boosting markets and that the economy will start on the slow road to recovery. Kneale says: "We expect the FTSE 100 index to be comfortably above 5,750 by mid-2009 as the toxic debt that has caused some of the most dramatic falls in stock market history is finally put to rest."

However, house builders, which have been one of the big casualties of the credit crunch, are unlikely to be looking to next year with optimism. With potential buyers finding it increasingly difficult to get a mortgage, the only way is down for house prices and therefore home builders will also suffer, according to Kneale. The shock of the credit crunch will have far-reaching implications for years to come and the hope is that regulators and financiers will have learned their lessons and avoid a repeat of such a dramatic downturn.

CORPORATE FINANCE
The crisis in investment banking that has seen some of the world's biggest players collapse or succumb to takeover will provide an opportunity for the smaller players to strengthen their foothold in the corporate finance market, says Rob Cormie, managing director at Quayle Munro.

It promises to be a testing challenge. Deals have dropped significantly (see Page 1) and the markets are squeezing the available finance, but Cormie believes this is a time when clients will turn to the experienced adviser, rather than rely on the size of the firm.

He'll be hoping to muscle in on a Scottish market with a few dominant players, including the boutique investment banks Noble Grossart and Noble Group, and the big accountancy firms. KPMG recently lured its top dealmaker David McCorquodale back to Scotland.

Cormie left KPMG to reinvigorate Quayle Munro's corporate finance business north of the border. He will be making two appointments in Scotland to work with the company's newly rebranded London operations and its office in New York.

Last year the firm acquired New Boathouse Capital and this year added the van Tulleken Company, a mergers and acquisitions specialist in media and technology software. Both businesses, employing about 25 staff in total, will move to new premises in London's West End, where they will operate under the Quayle Munro brand.

Cormie will work closely with chief executive Peter Norris, an industry veteran who was appointed chief executive of Barings Investment Banking just three months before the derivatives trading scandal brought it down. Norris founded New Boathouse in 2000 and has advised the Virgin group on a number of deals including last year's bid for Northern Rock.

Cormie admits this is a difficult time to be building a deal-making business, but says debt is almost always available for the right deal. "The story just has to be a little better," he says.