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UK banks and the British recovery story

Jason Hawkes | Iconica | Getty Images

The ties between Britain's banks and its economy have always been close, but they seem to have become even tighter in the post-banking bailout era.

When Royal Bank of Scotland rushed out its second-quarter results a week early (which was rather odd in itself – don't companies usually only rush out results if they're either worse than expected or leaked?) it tied in with the feel-good narrative that the U.K. recovery is picking up steam, and that this can be seen in the country's banking sector.

The true story is more complicated, as RBS management, to be fair, tried to point out on Friday. RBS's success in that particular quarter was mostly down to loan loss reversals in its "bad bank." This suggests that the better-than-forecast results have come from one-off re-valuations of assets like commercial properties- and this kind of growth, as Citi analysts point out, is "not sustainable."

While the loan loss reversals themselves point to a healthier economy -- and hopefully ultimately a healthier RBS which may one day pay off the U.K. taxpayer's investment in it -- they are not the medicine to fix the bank's niggling health problems.

U.K. banks' relationship with the broader economy is still not entirely smooth. The slowdown in U.K. mortgage approval rates, in recent months, shows the caution which has crept into lending since the stricter controls of the mortgage market review. This may, ultimately, help to cool the housing market further down the line.

There is encouraging data on savings, after a raft of more competitive products were introduced - new time deposit rates have reversed their decline and have now increased for three consecutive months. Lending to businesses is also starting to show solid growth, which is hopefully a sign that the U.K. economy has moved towards a broader-based recovery, than previous signals of a consumer spending-focused bounce suggested.

The rest of the bank reporting season for the second quarter is likely to be muted at best. Barclays, HSBC and Standard Chartered are expected to continue to feel the effects of weak trading in their fixed-income, currency and commodity (FICC) trading divisions. And one-off charges for legacy issues like the payment protection insurance scandal may hit Lloyds.

Barclays, HSBC and Standard Chartered have plenty of their own legacy issues to contend with. Even when FICC income starts to pick up (and some analysts are starting to forecast that this might happen as soon as the next quarter), there will still be question marks over the financial impact of possible future fines from several problems from the past.

- By CNBC's Catherine Boyle

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