HBOS under pressure as its shares plunge

HBOS, which also owns Bank of Scotland, saw its shares drop another 30 per cent at one stage today after yesterday's 18 per cent drop. Before the stock market closed the shares recovered slightly to 170.6p, a fall of 61.9p.

That means more than £5.8billion has been wiped off the value of Britain's biggest mortgage lender in the two days since Lehman failed. It is now worth just £8.6 billion.

But HBOS was not alone, with shares in all major British and European banks falling sharply as the interest rate which they charge each other to borrow money overnight soared to its highest levels for eight years. In effect, London-based banks virtually refused to lend each other dollars today.

"This is much worse than August last year," said one worried trader. Another said: "European banks just can't get hold of dollars. Banks are hoarding cash in case of payment issues."

Bankers said they were refusing to let go of any dollars, preferring to hold on to them in case they were suddenly called upon to settle outstanding trading options with Lehman Brothers.

That meant that the borrowing rate, or London Interbank Overnight rate, which is set officially in London around lunchtime for the dollar, more than doubled from 3.10625 per cent to 6.43750 per cent. That is more than three times the official US interest rate of two per cent and is the highest the interbank rate has been since April 2001.

Traders also said that HBOS could be the victim of short-selling by unscrupulous stock market traders for the second time this year. Others pointed to the fact that Lehman Brothers may be starting to unwind big short positions in HBOS shares, either taken directly by the US bank or by its clients betting that the Halifax owner's shares would fall further.

In March HBOS shares sank by more than 20 per cent on one day and the Bank of England took the highly unusual step of issuing a public statement denying rumours that it was holding emergency funding meetings with HBOS. The Financial Services Authority launched a major inquiry into the share slide and short-selling and said it would not tolerate such market abuse. But it never found the guilty parties and no one was prosecuted.

Today an HBOS spokesman said: "HBOS is strong. We have significant capital resources and the largest deposit base of any bank in the country.

Not everyone agreed that HBOS is in trouble. Alex Potter, banking analyst at stockbroker Numis Securities, told his clients to buy the shares and set a price target of 375p. He said: "We do not believe that HBOS has a liquidity issue. "

Jane Coffey, a fund manager overseeing £6 billion of equities at Royal London Asset Management, said: "We think HBOS shares have been oversold. I don't think the market has got it right. To sell the shares now means that you are assessing that HBOS is the next rescue candidate."