We're in the money! But maybe we won't get that much

Taxpayers could end up making a profit of less than £5bn from bailing out the Royal Bank of Scotland (RBS) and Lloyds Banking Group, far lower than previously hoped.

After a week of bumper profit announcements in the UK banking sector, which saw even RBS back in the black after three years of losses, there were suggestions that the Government could get at least £85bn for investments that have so far totalled £65.8bn. It signals a remarkable turnaround for the industry, which this week marks three years from the start of the credit crunch in much better shape than many hoped.

Vince Cable, the Secretary of State for Business, Innovation and Skills, told The Independent on Sunday that a sale of the state-owned bank shares would not happen until 2012 at the earliest. "Obviously the aim is to get maximum value for money, but also to do the timing in such a way that it doesn't interfere with any other government objectives," he said.

The taxpayer owns 84 per cent and 41 per cent of RBS and Lloyds respectively. The delay in cashing in the stakes will allow for the Independent Commission on Banking to complete a review into the structure of the entire sector. However, £15bn profits across the major banks caused excitement that the gamble of supporting them during the height of the financial crisis would eventually pay out and help to reduce the UK's massive debt burden. The Centre for Economics and Business Research forecast that the taxpayer could see a £19bn profit, but some of the government and City of London's leading experts strike a more cautious tone. They believe that by selling the stakes at huge profits the taxpayer will ultimately suffer as new investors pass on those costs to bank-account holders. The Government may think it sensible to make a smaller return, satisfied that the banks and the financial system are simply on a surer footing.

A more immediate problem for ministers has been the ongoing battle to persuade banks to lend to small businesses, while also fulfilling requirements for more cautious behaviour. Mr Cable said: "The fundamental dilemma is that the regulators ... are trying to ensure banks hold more capital so they are less vulnerable to future collapses. But the other objective is that we want banks to lend to good companies who depend on them, particularly in the SME [small and medium enterprise] sector. Those objectives are at odds with each other."

Bruce Packard, analyst at Seymour Pierce, said that speculation over likely returns from rescuing RBS and Lloyds had falsely implied that the Government was looking to make the sort of money normally associated with venture capitalists. He said: "I think the Government will look to achieve some sort of small profit. I don't think that they will be looking for private-equity type returns ... They took the stakes to stop people queuing outside the bank branches. I'm not sure it would be a great idea to make superprofits."

This echoes comments made last month by Andrew Tyrie, the new chairman of the Treasury Select Committee. He said that there was "a risk of governmental conflict of interest" in trying to maximise the price of any share sales and ensuring that the stakes ended up with the best investors to support the banks in the future.

Mr Packard suggested that he expects the Government to sell at about 1.2 times what it paid for the shares. But once the Government's cost of borrowing to pay for the bailout is factored in, this would mean the taxpayer would make only a 7 per cent profit.

The Government started investing in the two banks in late 2008, and earlier that year nationalised Northern Rock and Bradford & Bingley. The bank failures became the UK's symbols of the credit crunch, the third anniversary of which falls tomorrow.

There had been signs in the first half of 2007 that the Western world's boom was about to go bust, with the collapse of US sub-prime mortgage specialist New Century Financial. There were also signs that banks were no longer lending buyout firms money on frighteningly lax terms and conditions – known as "covenant-lite".

However, 9 August 2007 has become widely known as the start of the credit crunch, which led to global recession and a rethink of how Western countries do business. On that date, the French investment bank BNP Paribas told investors in two of its funds that they would not be able to withdraw their money. There was no cash available as banks were not lending to each other – the key to the Western world's financial system.

There would soon emerge a number of villains in the big banks, mainly men who stood accused of allowing their egos to jeopardise their companies and the wider economy. Most infamously, RBS chief executive Sir Fred Goodwin completed Europe's biggest banking takeover, splashing out €71bn for Dutch rival ABN Amro in October 2007. Barclays had been favourite to win the battle for ABN, but wisely decided against getting into a financial fistfight with the risk-taking, combative Sir Fred.

Cracks soon started to emerge. The following April RBS launched the biggest rights issue – that is, going cap in hand to existing shareholders for money – ever seen in the UK and wiped £5.9bn off the value of its investments.

By the end of the year RBS had to be saved by the Government, which also persuaded Lloyds TSB to take over HBOS. The latter had extraordinary problems, largely related to the bad loans it granted to commercial and residential property developers, which will take years to resolve.

Sir Fred quit and tried to keep out of the public eye, but failed when the enormity of his pension payout was unveiled in February 2009. His Edinburgh home was attacked and he eventually agreed to reduce his pension pot by more than £200,000 a year.

Earlier this year he finally found work as group strategic adviser to Scottish architectural practice RMJM. His biography on the company website describes him as having "many years' experience of building global businesses and expanding into international markets". It does not mention his eight years at the helm of RBS.

Less widely vilified was Adam Applegarth, who visibly struggled with the scale of the crisis before him when, as head of Northern Rock, he presided over the first run on a UK bank since the 19th century. As reports emerged that Mr Applegarth had requested and secured financial support from the Government, customers panicked and joined the long queues forming outside branches to withdraw their money.

On the other side of the pond came the bankruptcy of the investment banking giant Lehman Brothers in September 2008. This showed that no institution was "too big to fail". It went into Chapter 11 bankruptcy with debts of $619bn. Barclays and Bank of America both decided it was too risky to buy the business, which had spectacularly failed on betting on the strength of the sub-prime mortgage market.

Despite all the warnings and failures, it was Lehman that took the global markets to the brink.

Tony Lomas, the partner at PricewaterhouseCoopers who has led the administration of the London-based arm of Lehman, is shocked by the scale of unravelling of the bank's European assets. He worked on the administration of the notorious Enron bankruptcy, but says Lehman is "at least 10 times" more complicated.

As a result of the banking failures the Government has resolved to change the way the sector is regulated, and there is a growing drive to break up banks so that risk-taking corporate investment divisions do not endanger high street customer deposits.

Three years on, Mr Cable warns that the big banks are still "structurally dangerous".

The IoS panel: 'You just have to ride the storm'

Andy Chambers, plumber

Age: 43. Lives: Brentwood, Essex. Marital status: Divorced. House: Owned. Cars: None – uses company car. Children: One daughter and two sons. Income: Less than £50,000 per year

"I would say work's got worse rather than better. There was more around last year than this year. I think other plumbers are undercutting everyone else and people are not having as much work done; and I think people have tightened their belts and they're not ready to release them yet. I've got friends in different trades that don't have any work either. People can't afford to get small extensions built, and it has a knock-on effect. You just have to ride the storm. You never know what next week is going to bring."

Andy Brown, teacher

Age: 40. Lives: Ballymena, Northern Ireland. Marital status: Married. Children: Two. House: Owned. Cars: Two Income: £50-£60k (joint)

"Not very much has changed for us over the past couple of years. There is a new 2.3 per cent pay deal, which is good, but we are really worried about what will happen next for our pensions and in terms of public-sector cuts. We are very aware that we are in the midst of a recession. It is a huge issue for us, what will happen if you lose funding for schools and for teachers. We are also worried about securing capital building supplies for schools. There are teachers here doing their very best to deliver a first-class curriculum in buildings that aren't fit for purpose."

Joanna Cobb, estate agent

Age: 32. Lives: Hereford. Marital status: Married. Children: None. House: Owned. Cars: One. Income: Declined to say

"The attitude of house-buyers has changed slightly. People used to be more optimistic about selling. A year ago, they would view a property on the market whether or not they had a potential buyer for their house, but now they are not viewing until it has sold. We have had four exchanges in August already, so that is the busiest we have been for a long time, but partly that is because it's summer and people want to move in the summer holidays and get their kids settled into school and things like that. But it's not very busy. For myself, I do feel optimistic, I think the market will change."

Jacqueline Rice, pensioner

Age: 70. Lives: Peterborough. Marital status: Married. Children: Four sons. House: Sheltered accommodation. Cars: None. Income: £9,000 pa

"Our son has started doing our monthly shop for us because I'm not mobile, and he gets us good deals. Food prices have shot up. Last time my husband and I went shopping it really panicked us. In two months our shopping bill has gone from £76 to £89. We can't afford that again. We would have to cut back on necessities. The first thing to go would be cleaning products, but then how would we keep the house clean? I've already started Christmas shopping because it's cheaper now. I'm scared I'll have to give my children things that are no good because we can't afford more."