New bank crisis at troubled HBOS

Shares in HBOS, owner of the Halifax, fell by a third at one stage on fears that it could be the next major bank to run out of money following the collapse of Lehman Brothers.

The day after the biggest meltdown on Wall Street since the 1929 Crash, the FTSE-100 fell below 5000, its lowest level for three years, before recovering slightly.

The British economy was under siege after a series of other blows including inflation hitting a worse than expected 4.7 per cent last month with food prices rising at a 28-year high rate of 14.5 per cent in a year.

On another day of high drama in the City, HBOS rushed out a statement to the Stock Exchange to stop the two-day slide, which has wiped £6billion from its value. The statement said: "HBOS notes the current volatility in bank share prices following developments in the United States. HBOS has a strong capital base and continues to fund very satisfactorily."

It came as trading in AIG, the world's largest insurer, was briefly suspended on the New York Stock Exchange after a massive fall. Shares recovered sharply on reports that a bail-out was likely tonight.

In a further dramatic development, UBS, Europe's biggest bank, was also forced to issue an emergency statement telling investors it did not expect its total losses caused by the collapse of Lehman to exceed $300 million.

The turmoil continued despite a huge injection of cash into the world's financial system by central banks. In total, the Federal Reserve, the European Central Bank and the Bank of England pumped £102 billion into the markets.

In London, all eyes were on HBOS, which suffered a second day's mauling from speculators. HBOS, which also owns Bank of Scotland, saw its shares drop another 33 per cent at one stage today after yesterday's 18 per cent drop.

Before the stock market closed the shares recovered slightly on the emergency statement but only to 168.3p - a fall of 64.2p or 28 per cent. The £ 6billion losses at HBOS meant it was worth just £8.5 billion.

In the money markets the interest rate which the European banks charge each other to borrow money overnight soared to their highest levels for eight years. In effect, London-based banks virtually refused to lend each other dollars today. One worried trader said: "European banks just can't get hold of dollars. Banks are hoarding cash in case of payment issues."

Bankers said that banks were refusing to let go of any dollars which they were holding in case they were suddenly called upon to settle outstanding trading potions 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 3.1 per cent to 6.43 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.

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 had cancelled staff holidays over Easter and was holding emergency funding meetings with the bank.

City regulator the Financial Services Authority launched a major probe 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 bank. We have significant capital resources and the largest deposit base of any bank in the country."