Britain's Financial Services Authority is investigating trading in UK financial stocks after rumors of banking trouble battered shares and led mortgage bank HBOS on Wednesday to a record
Market jitters over the past months have been exacerbated since the near-collapse of Northern Rock by persistent rumours of liquidity and funding trouble elsewhere in the UK banking system, hitting other lenders despite repeated denials.
"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," Sally Dewar, the FSA's head of wholesale and institutional markets, said in a statement.
"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."
Earlier, the Bank of England said it was not aware of a problem at any British bank, in a rare response to the market speculation that HBOSor another big name faced trouble as the
financial market crisis deepens.
"No meetings have taken place or been scheduled to discuss problems with any institution in the UK," a BoE spokesman said.
HBOS, Britain's biggest mortgage lender through its Halifax brand, also dismissed the speculation, saying it had an "exceptionally strong balance sheet" and continued to access wholesale funding.
Its shares slumped as much as 17 percent to a record low of 398 pence earlier on Wednesday, and were still down 10.5 percent.
Shares in rivals Alliance & Leicester and Bradford & Bingley also both fell over 5 percent as dealers cited talk that higher funding costs were heaping pressure on banks facing a UK economic slowdown and more potential losses on risky U.S. assets.
The chatter reflects a jittery mood still swirling around the UK banks, dealers and analysts said. A 3/4-point cut in U.S. interest rates late on Tuesday offered only brief respite for stocks.
The BoE spokesman said rumors that the central bank's Governor Mervyn King or any other senior executive had cancelled a trip to the Far East due to a possible problem were "complete fantasy".
King deferred a trip to England's West Midlands on Tuesday to monitor general market developments after the weekend bail-out of U.S. investment bank Bear Stearns, he said.
A crisis at Northern Rock six months ago was sparked by its failure to raise funds in wholesale markets following a credit crunch, and this week's fire sale of Bear Stearns has heightened concern there could be more casualties.
A spokesman for HBOS said: "We're a very diversified business with an exceptionally strong balance sheet."
As the biggest savings provider in Britain it has access to "a deep pool of retail deposits", he said, adding: "We continue to access wholesale markets whenever we feel it is appropriate to do so. We are one of the best names in the capital markets."
HBOS shares have lost over half their value since the end of July, and have tumbled 40 percent this year alone, compared with a 15 percent fall for the UK bank sector since the start of the year.
Analysts said concerns about the impact of a slowing UK housing market and commercial property market, its exposure to U.S. Alt-A mortgages, and rising funding costs had hurt HBOS.
The interbank cost of borrowing three-month sterling hit a fresh high for the year on Tuesday, rising for an 8th successive day to 5.97250 percent.
Lending has slowed amid worries about counterparty risks, making banks wary about lending to one another.
The BoE said on Wednesday it had not made any loans through its standing facility in the previous trading session.