Bank saved from brink of collapse

Shares in HBOS, owner of Britain's biggest mortgage lender Halifax, dropped almost 20 per cent at one stage in a wave of selling.

The Bank of England had to issue an unprecedented denial that HBOS was in crisis - underlining the continuing panic in the financial markets following the collapse of Northern Rock in Britain and Bear Stearns in America.

An investigation was under way this afternoon into the possibility of suspicious trading.

The drama started to unfold at 8.31 when shares in HBOS began to wobble. What followed was one of the most remarkable morning's trading in recent stock market history.

8.33am: HBOS shares plunge as some traders launch a sudden raid on the stock. At the same time rumours about HBOS's solvency and demands for funding from the Bank of England start to sweep through the market.

8.51: HBOS's shares plunge to 4001/4p and the FTSE100 dives to 5570.

9.02: HBOS denies the rumours. A spokesman says it has an " exceptionally sound" balance sheet.

10.15: Bank of England press officers phone news organisations including the Evening Standard to kill off rumours of crisis meetings and HBOS cash shortfalls. HBOS shares start to recover.

12.30: Financial Services Authority says it is investigating suspicious trading in UK financial shares.

Market commentators said it was unprecedented in recent history for the Bank of England to be forced to issue a denial that a major high street bank was in difficulties.

The Bank denied that any bank had asked it for emergency funding or asked for a meeting with it.

It also denied as "fantasy" suggestions that Governor Mervyn King had cancelled a trip to the Far East or that all staff at the Bank had been told to cancel leave over Easter weekend because a bank might be in trouble.

Analysts said that the Bank of England had clearly learned from the dithering by the authorities over the collapse of Northern Rock last year and the much faster rescue over last weekend of Bear Stearns in the United States. The Financial Services Authority, the City watchdog, aggressively warned stock market traders that it would not tolerate abuse of the stock market by people spreading false rumours and then trying to make a profit. Sally Dewar, head of the FSA's wholesale markets, said: "There has been a series of completely unfounded rumours about UK financial institutions in the London market over the last few days. We will not tolerate market participants taking advantage of the current market conditions to commit abuse by spreading false rumours and dealing on the back of them." HBOS has more private shareholders than any other company in Britain. Its 2.1 million small shareholders are almost all customers of the bank. In the last six months they received £130 million in dividend. Halifax is Britain's biggest mortgage lender with outstanding loans of £430 billion.

Today an irate HBOS spokesman described the rumours as "completely malicious", adding: "They are deeply destabilising for the whole UK financial services system. HBOS has an exceptionally strong balance sheet with access to a deep pool of retail deposits."

He stressed the difference between HBOS, which funds the vast majority of its mortgages from the deposits it takes from savers and Northern Rock - which collapsed because it funded two thirds of its mortgages from the world's money markets which dried up when the credit crisis began last summer.

Stock market veteran David Buik dismissed the rumours that HBOS was in trouble: "I have been familiar with the businesses of Halifax Building Society and Bank of Scotland for 30 years. I doubt you could meet two more conservative outfits and I have no real reason to believe their culture has changed."

Neil Dwane, chief investment officer at fund manager RCM, said: "What is terrifying for financial markets is the power of market rumour."