A second £5 billion injection into the markets in three days by the Bank of England failed to stop shares falling again yesterday as lingering banking woes continued to strangle investment.
The move by the Bank came as it held talks with representatives of the banking industry to discuss the ongoing credit crunch whether greater regulation in the sector is needed.
London’s FTSE 100 Index finished nearly one per cent lower at the end of trading yesterday at 5495.2 – down 50.4 points on the day and by an overall 2.5 per cent after the past four days, which saw some of the most volatile conditions in recent memory.
The situation was not helped when Credit Suisse poured cold water on hopes that the banking industry was on the mend as it warned that difficult market conditions in March was likely to lead to a first-quarter net loss, erasing gains made in the first two months of the year.
The bank, initially among those least affected by the credit crisis, also said an internal probe into the mispricing of complex securities, with which it shocked markets in February, would lead to losses of more than £500 million.
Meanwhile, liquidly concerns in the US continued to affect Wall Street where trading was again depressed.
The Bank of England’s decision to pump £10.9 billion into the economy was welcomed although many financial institutions said far more was needed if the banks were to continue hoarding their cash.
The increased funds will be made available until the beginning of April. The European Central Bank keen to help kickstart the economy, followed the BoE’s lead by lending more cash. The effect of this remains to be seen.
Liquidity, rumour-mongering and housing market troubles are thought to have topped the list of subjects at the meeting.
However, the Bank was guarded in its comments and at the end of yesterday's discussions issued a brief statement saying: "The Bank of England and the banks agreed to continue their close dialogue with the objective of restoring more orderly market conditions."
The UK’s biggest mortgage lender, Halifax Bank of Scotland, saw a slight recovery yesterday after being struck by Wednesday's rumours that it had approached the BoE for emergency funding.
It ended the day as the Footsie’s third-best performer, closing up 27.5p at 473.75, or six per cent.
The Financial Services Authority said yesterday it had already been contacted by market players claiming to know the source of rumours.
An FSA spokeswoman said: "We have found that other market participants are very keen to talk to us about these matters and we're very keen to talk to them.
"This is something they want to see removed."
However, the watchdog said it was not on a witch hunt against short sellers, but was trying to track down the rumour-mongers.
Hedge funds and other investors who sold out of HBOS and quickly bought back on Wednesday are likely to receive a call once they are identified by the regulator.
Trading volumes spiked yesterday, making the regulator's job more difficult than usual, and the spokeswoman said it was unable to say when its enforcement team might start knocking on doors.
Further difficulties lie in reports suggesting that Wednesday's rumours originated outside the UK, which could limit the FSA's scope for action.
Some experts raised doubts about the FSA investigation. David Jones, chief market strategist at IG Index, said: "All of the discussion about market rumours has raised some important questions amongst the more cynical market commentators.
"If rumours causing share prices to fall are going to be investigated, then are rumours that result in share prices going up, for example regarding potential takeovers, going to be given the same weight? If so, market regulators should be kept very busy."
Traders are thought to have made millions of pounds by circulating false speculation surrounding some of the UK’s biggest companies. The Bank of England and the banks agreed to continue their close dialogue with the objective of restoring more orderly market conditions