Shares in UK bank HBOS led a decline in banking stocks as turmoil on the financial markets triggered by the collapse of Lehman Brothers continued.

Investors are concerned that HBOS is too dependent on money markets to fund its lending as the cost of borrowing shoots up.

Shares in HBOS closed down 21.7%, or 50.5 pence at 182p. Earlier in the day the shares were down 34%.

In a statement, HBOS said it had a “strong capital base”.

Ratings agency Standard & Poor’s lowered its credit rating on HBOS. It said the bank’s credit risk was higher than some of its rivals because high loan-to-value and specialist mortgages made up a “sizeable” part of its mortgage book.

S&P also said that the ratio of loans to customer deposits at HBOS was higher than many of its similarly rated peers, making it more vulnerable to rises in borrowing costs on the money markets.

Confidence

HBOS, the biggest UK mortgage lender, was the biggest decliner in the FTSE 100 index.

Not far behind was Royal Bank of Scotland, whose shares ended down 10.2% at 189.1p. Barclays fared better, its shares closed down 2.53% at 308p.

The interest rates at which banks lend to each have risen sharply since Lehman’s dramatic collapse over the weekend, suggesting that banks are losing confidence in each other.

Overnight sterling Libor increased from 5.5% to 6.8%, and the dollar Libor rate increased from 3.1% to 6.4%.

HBOS said on Monday that the group had the strongest capital ratio of all the major UK domestic banks.

“As we reported at the interim results, we are comfortable with our funding profile. We have access to a diverse range of funding sources and that hasn’t changed,” it added.

HBOS was created in September 2001 following the merger of the Halifax and Bank of Scotland.

News reported by The BBC

Abbey, one of the biggest mortgage lenders in UK, has announced another round of cuts in mortgage interest rates for new borrowers.

The cost of two- and three-year fixed and tracker rates is coming down by up to 0.1% after similar cuts last Friday.

The past month has seen a series of rate reductions from major lenders as well as some smaller ones.

This week the Halifax cut the cost of many of its deals again, by up to 0.38% in the case of a two-year fixed rate.

The bank reduced the rates on 30 different mortgages deals, with one two-year fixed rate deal coming down to 6.19%.

The Bank of Scotland, which is part of the HBOS group that also owns the Halifax, also cut rates on 36 deals by up to 0.7%.

“There are increased signs of competition in the market and the big lenders are starting to slug it out a bit” Ray Boulger, John Charcol mortgage brokers

A Halifax spokesman said the latest rounds of cuts was intended to ensure that the bank met its target of lending 20% of all new mortgages.

“It’s down to competitor activity, we are aiming for a one-in-five market share,” he said.

Competition returns

Nationwide, Abbey, the Halifax and others have cut their rates in response to a reduction in the cost of borrowing wholesale funds on the financial markets.

Ray Boulger of the mortgage brokers John Charcol said this was good news for borrowers, who have found it much harder to borrow money this year in the wake of the credit crunch.

And he said it was clear that competition was returning to the mortgage market.

“Two-year swap rates [the cost of lending between banks] are now 1% down from their peak in the middle of June,” he said

“So there are increased signs of competition in the market and the big lenders are starting to slug it out a bit,” he added.

Abbey recently said it had become the UK’s biggest lender of new mortgages, accounting for 26% of all new home loans in the first half of the year.

By contrast, the Halifax accounted for only 7% of new lending in the same period.

Fees

With house prices falling rapidly, banks and building societies have become much warier about making larger loans in case borrowers run into financial trouble.

It is generally expected that house prices may fall by between 15% and 20% in the course of this year and next.

So the best rates continue to be available only to those borrowers who can raise a deposit of 25% or more.

However Darren Cook of the financial information service Moneyfacts said some rate reductions were not as good as they seemed.

“The average rate on a two-year fixed rate mortgage has dropped from 7.08% at its peak on 11 July to 6.90% today, but typically there is a sting in the tail,” he said.

“During the last month the average fee has increased by nearly £100, meaning that borrowers have not benefited as much from a reduction as expected.

“On a £150,000 repayment mortgage, a £100 increase in fee equates to an additional 0.06% increase in the rate,” he added.

In the case of Abbey, its best rate for two-year tracker mortgages is now 5.89% while its lowest rate for a two-year fix is 6.19%.

The standard up-front fee amounts to just under £1,000 in both cases.

But, in another sign of renewed competition, borrowers wishing to take out a fixed-rate loan of £150,000 or less will be charged a reduced fee of £549.

News reported by The BBC