Another bank is feeling the heat of the credit crunch as London Scottish fell into the red yesterday.

The loss of £15.7m in the last 12 months leading to the end of October was £5m more than expected and has forced the bank to change its current business model. It is planning to be more cautious with lending, a sign that the cheap credit era is over.

London Scottish had seen great success in the past by lending money to people on low-incomes. However, the rise in interest rates and mortgages for those on variable rate schemes has increased the number of payment defaults amongst its clients.

Sensibly, the bank has decided to sell of its assets and re-invest this money in its debt collection company, Robinson Way. This side of the business actually made a profit of some 57 per cent over previous figures to £13.9m.

The Boss of the FSA, Hector Saints said in an interview with Radio 4 today that: “I don’t think markets are ever going to return to the way they were. The new normal will be very different to the way markets have behaved in the past.

Banks themselves will need to give consideration to how their business models will need to adapt to the changing circumstances we have seen.”

He also blamed the culture of huge city bonuses and believed they were to blame for too much risk taking in the market. London Scottish specialised in offering loans to those who would otherwise have been unable to sustain them and now banks such as London Scottish and Northern Rock have struggled, with in the case of the latter resulting in it being bailed out with nationalisation by the government, consumers are going to find it ever harder to get credit.

This will obviously have a huge knock-on effect across the whole industry, as fewer people capable of buying homes will mean a shortfall in demand which will hit house prices. Higher interest rates will put people off taking out loans for premium goods, high street spending will inevitably blip and that is when the risk of recession is at its greatest.

Hector Saints concluded: “This strategy rebalancing may further affect the availability and price of credit, but from a regulator’s point of view that is not necessarily a bad thing.”

There was one ray of sunlight however, as London Scottish declared their plans to the city, their share-price rose significantly.