AN INVESTIGATION into rogue trading tactics was ordered yesterday after false rumours of funding difficulties sent HBOS shares plummeting.
As the stock market plunged back into the red, the Financial Services Authority (FSA) said it was investigating whether traders had deliberately sought to undermine the value of bank shares.
HBOS, Britain's biggest mortgage lender, bore the brunt of a day of rumours, with a wave of selling sending its shares down 17 per cent at one point to a record low of 398p, wiping more than £3 billion off its stock market worth.
The Bank of England made the unprecedented move of denying any suggestion HBOS had turned to it for emergency funding.
Stocks endured a day of volatility, as Tuesday's euphoria over the interest rate cuts in the United States proved short-lived. As the turmoil showed no sign of abating, Alistair Darling, the Chancellor, moved to reassure people that the UK's economic growth plans remained on track.
He said the collapse of the US investment bank Bear Stearns this week had not changed his view that Britain would ride out "shocks" from the credit crunch.
But shares on both sides of the Atlantic were mired in the red, with the Dow Jones Industrial Average on Wall Street closing nearly 300 points lower last night. In London, the FTSE 100 closed 60.2 points down, at 5,545.6.
HBOS closed at 446.25p, down 7.1 per cent, having recovered some of its earlier losses. Royal Bank of Scotland fell 2.9 per cent and Alliance & Leicester shed 2.7 per cent.
LloydsTSB was cited as facing problems, but the bank said it was funding its operations strongly and it clawed back an early 3 per cent fall and ended higher.
HBOS
dismissed yesterday's speculation, saying it had an "exceptionally strong balance sheet" and continued to access wholesale funding.
It slammed the rumours as "malicious" and "lies" and insisted the bank was one of the strongest financial institutions in the market.
Shane O'Riordain, a spokesman, said: "There has been a series of rumours in the market today – a number of ill-founded and malicious rumours about the UK banking system in the markets. These rumours have not a shred of substance whatsoever. They are lies."
He praised the FSA's "decisive action" to investigate the alleged market abuse.
"It really is time these people who wish to make money out of spreading lies are brought to book," he said. "We are one of the most respected names in the retail and capital markets and a strong and secure financial institution."
The Bank of England, which had come under fire for failing to react quickly enough to the Northern Rock crisis six months ago,
issued a statement saying: "No meetings have taken place or been scheduled to discuss problems with any institution in the UK."
The FSA had also faced criticism over the Northern Rock debacle. Yesterday, Sally Dewar, its managing director for wholesale and institutional markets, said: "There has been a series of completely unfounded rumours about UK financial institutions in the London market over the last few days, sometimes accompanied by short-selling.
"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.
"We remind market participants of the need to take extra care, in this market climate, to adhere to the market code of conduct."
An FSA spokesman said one of the "bizarre" rumours that had been spread around the market was that Bank of England Governor Mervyn King had postponed a trip to the Far East because of the market turbulence.
The reality, she said, was that Mr King had decided not to go to West Bromwich, although she could not say what his trip had been for.
Alex Potter, an analyst at the stockbroker Collins Stewart, said it believed the HBOS share plunge was "on fears surrounding write-downs and liquidity".
He said: "We believe its exposure to the UK consumer, level of exposures to 'toxic' debt investments, gearing to private-equity gains within revenues and potential impact from rising wholesale funding costs mean the bank will underperform the UK banks sector on a 12-month view."
Martin Slaney, of the spread-betting firm GFT Global Markets, said there was an "unusually high number of rumours winging around the stock market".
He described UK banks as being the latest victims of the over-active rumour mill, adding: "Much of this is probably unfounded supposition and speculation, but with panic still gripping the markets, investors seem to be attaching more credence to the scaremongers than would be the case in more stable times.
"One rumour breeds another but it is a brave investor who discounts the market grapevine in such volatile times, so the gossip tends to become self-perpetuating."
Mr Darling insisted his growth forecasts for the UK economy remained "realistic" despite the turmoil engulfing global financial markets.
The Chancellor said the collapse of Bear Sterns had not changed his view that Britain would ride out the credit crunch, and he pointed to new figures showing unemployment had fallen as evidence that the UK economy was still "resilient" and could expand by 1.75-2.25 per cent this year.
Historical legacyHBOS plc was established in September 2001 from the merger of the Halifax and Bank of Scotland, Scotland's oldest bank, becoming the fifth largest financial services company in the UK.
The company, which has its headquarters in Edinburgh, currently employs about 65,000 people in the UK, and 73,500 worldwide.
Since it began trading in 2001, HBOS profits have doubled, and its share of the current account market has gone up from 7 per cent to 12 per cent.
With 22 million customers (two out of every five UK householders) it is the largest mortgage and savings provider in the UK and one of the UK's leading general insurers.
HBOS also has significant interests outwith the UK, including Bankwest in Australia and Banco Halifax Hispania in Madrid. It launched a new retail bank in Ireland in 2006.
HBOS has 2.1 million private shareholders, representing the biggest private shareholder base in the UK, and about 80 per cent of these shareholders are also HBOS customers.
Scotland has the single largest concentration of HBOS employees in the UK - 17,600. More than 8,000 staff are based in Edinburgh, the Lothians and Fife.
Earlier this month HBOS announced plans to consolidate all its offices in Edinburgh and the Lothians on to one site.
Bank of Scotland was founded in 1695, by an Act of the Scottish Parliament.
