The CBI's quarterly findings showed that both numbers employed and business profitability had fallen at the sharpest rate in five years, with most firms predicting the 'credit crunch' to worsen in the next six months.
Furthermore, around a quarter of businesses surveyed revealed they had cut jobs in the last three months - the highest rate since March 2003.
Business volumes have experienced a significant slump and a record balance of respondents (-44 per cent) had seen a fall in the value of fees, commissions and premiums. Income from net interest, investment and trading also fell sharply.
Overall, the profitability of the financial services sector has dipped sharply after holding up last quarter, however the CBI predicts a degree of stability to return in the coming three months.
Lending to private individuals fell sharply, however lending to industrial and commercial companies increased.
The CBI also found that as financial institutions adapt to the credit squeeze, average spreads - which measure the difference between the rates at which money is borrowed and lent - were felt to have widened strongly (a balance of +35 per cent). This was the largest gap since March 1993 (+48 per cent).
Redundancies made by banks due to falling profitability were singled out, however spreads had been increased by both banks and building societies.
Andrew Gray, UK banking advisory leader, PricewaterhouseCoopers LLP, said: “Despite market conditions and a mortgage demand slowdown, building societies remain quietly confident in their ability to fund and manage their business."
All of these factors combined have led to a strangulation of business growth. Close to a third of firms admitted that they are much less optimistic about the overall business situation in the sector than in December 2007.
Ian McCafferty, CBI chief economic adviser, said it was clear that the 'credit crunch' had worsened in 2008.
"The interbank markets have become more gummed up. While liquidity injections and interest rate cuts by the Bank of England will help shore up the system, neither will solve the fundamental problem of restoring trust, so that credit markets are unlikely to return to anything like normality for some time to come.
He warned that even when lending conditions do regain an ounce of normality, they will not return to the 'very favourable' situation seen before August 2007.
