Australia's central bank on Tuesday denied market speculation that one or more regional Australian banks had come to it for emergency funding due to the global credit squeeze.
Reserve Bank of Australia Deputy Governor Ric Battellino said: "Those rumors are false," when asked about the speculation. The rumors had knocked the Australian dollar lower and hurt shares of several regional Australian banks.
Most banks also denied the market talk.
Adelaide Bank, which recently agreed to be acquired by Bendigo Bank fell as much as 8.1%, while Bendigo slipped 6.4%.
An Adelaide Bank spokesman said there was no truth in the market talk of the bank having approached the Reserve Bank, while Bendigo Bank officials were not available for comment.
Another regional lender Bank of Queensland lost 5.9%. A Bank of Queensland spokesman said, "We are doing fine, we are in good shape."
Turmoil at UK lender Northern Rock and a sharp fall in the share price of fellow bank Alliance & Leicester also hurt sentiment in the Australian financial services sector, traders said.
"The mood is very skittish and looking at what happened with some U.K. banks, people are selling first and asking questions later," said Peter Wright, a sales trader with stock broker Burrell & Co.
Like most other global financial institutions, Australian banks are faced with higher funding costs as the credit crunch bites. This has already led some banks and non-bank lenders to raise product prices, or remove discounts offered to lure customers.
Analysts say the big four lenders -- National Australia Bank, Commonwealth Bank of Australia, Australia and New Zealand Banking Group and Westpac Banking -- could also be forced to raise mortgage rates due to the rising cost of funds.
Australian banks are also transferring billions of dollars worth of loans back on to their balance sheet as the funding for such off-balance sheet vehicles has dried up.
The big four banks account for about 70% of Australia's banking assets and are seen better placed to weather the credit storm as they derive a large part of their deposits from retail investors.
In contrast, non-bank lenders like RAMS Home Loans Group have suffered because they need to borrow from the short-term commercial paper market to lend to their customers. That short-term debt market has virtually dried up in the fallout from the U.S. subprime mortgage crisis.
RAMS shares were down 3.8%, having tumbled some 70% from an initial public offer price of A$2.50 when it listed less than two months ago.
Australia's A$850 billion (US$708 billion) home loan market is still dominated by banks, but non-bank lenders have taken some 15% market share over the past decade and a half.