AMID mounting fears that higher interest rates could set off a housing-market crash, shares in Scotland's two biggest banks plunged to multi-year lows yesterday.
Shares in HBOS, Britain's biggest mortgage lender, plunged 12 per cent to 258p, smashing through its plans for a £4 billion rights issue at 275p a share.
In a torrid day of trading, shares in rival RBS plunged 29.25p or 9 per cent to 212.25p, d
espite a better-than-feared trading update early yesterday. Alliance & Leicester tumbled 29.25p or 8 per cent to 318.75p.
Shares in leading housebuilders were also battered, with four suffering double-figure percentage falls. Barratt Developments crashed 21 per cent to just 72.5p. Shares in the UK-wide housebuilder have fallen 93 per cent since this time last year on growing fears of a housing crash.
The fear is that the spiralling oil price – US crude jumped $6.99 to $138.30 a barrel yesterday – will drive the economies of America and Europe into recession, while central banks will have to raise interest rates to counter the inflation threat.
HBOS issued a statement saying its rights issue was proceeding according to plan – but its plan is unlikely to have envisaged the severity of the share price slide in recent weeks and a stampede by investors for the exits.
The rights call, already recently extended by six weeks to 18 July, is now set to be shunned by pension funds, institutions and the group's two million private investors, opening the prospect of the underwriters Morgan Stanley and Kleinwort Dresdner dumping millions of unwanted shares onto the market, further smashing the price.
HBOS in effect said yesterday, that "the bank is not for turning". But unless the bank's shares stage a dramatic rally, the only way out of a further price slump would appear to be a repricing of the rights issue, or the arrival of an overseas investor prepared to buy a substantial percentage of the bank's equity capital.
Such is the rout in the banking sector that it is likely to receive close attention at the Bank of England, the Treasury and the Financial Services Authority in view of its potential to become self-feeding.
The cause of the latest instability is not the financial market per se but the prospect of a collapse in confidence in the housing market – and housing is the most widely used collateral for household borrowing.
Investors fear that Britain's banks could be facing a surge of loan arrears and defaults if, as money markets are now discounting, interest rates are to be raised.
The combination of a housing slump, rising oil prices, gloomy economic warnings from the US Federal Reserve and rising interest rates saw 104 points or 1.8 per cent wiped off the FTSE 100 yesterday. The Dow fell 206 points or 1.7 per cent in New York.
RBS chief executive Sir Fred Goodwin said in his pre-close trading statement yesterday that the bank's appetite for lending risk had been "tempered by a cautious stance in relation to short-term economic factors and market conditions".
He said the bank was cautious on unsecured lending and property.
The full article contains 540 words and appears in The Scotsman newspaper.
