SHARES IN Halifax Bank of Scotland (HBOS), owner of Bank of Scotland (Ireland), fell 22 per cent yesterday amid concerns about its reliance on wholesale funding after the Lehman Brothers' collapse.

Shares in the bank, which is Britain's largest mortgage lender, fell as much as 40 per cent earlier in the session and settled 50½p lower at 182p, cutting its market capitalisation to £9.58 billion (€12.38 billion).

The collapse of Lehman has made banks more reluctant to lend to each other in the wholesale markets, and this has widened interbank lending rates, making funding more expensive.

The jitters in the wholesale market have hit HBOS because it has a large reliance on wholesale funding even though it has a retail deposit base of £258 billion, which accounts for 55 per cent of its funding.

HBOS has wholesale financing commitments of £278 billion, of which £167 billion have a duration of less than one year.

Citigroup analysts yesterday estimated that the funding gap of HBOS was £197.8 billion.

They also estimated HBOS had £29 billion worth of term funding maturing as of the first half in 2008 and about £24 billion it needed to refinance each year.

HBOS also has one of the highest loan-to-deposit ratios of any European bank at 177 per cent.

This measures the amount of a bank's loans divided by the amount of its deposits and is seen as one measure of risk.

Yesterday, the Financial Services Authority, the UK financial regulator, and HBOS said the bank had a strong capital base and "continued to fund very satisfactorily".

However, the market jitters caused HBOS's credit default swaps - which measure the cost of insuring the bank's debt - to widen from 219 basis points last week to 315 basis points yesterday.

There was speculation that HBOS could be a takeover target for a larger rival such as Lloyds TSB or HSBC.

HBOS is seen by analysts as too important to the health of the financial system to run into difficulty.

HBOS can access the Bank of England's special liquidity scheme, which ends in October, although there is uncertainty about what scheme might replace this.

Ian Gordon, an analyst at BNP Exane, said: "We believe the market has assigned an unduly pessimistic assessment of HBOS's funding position, and therefore as the position is clarified - possibly aided by further evidence of support from the Bank of England - the HBOS's share price should recover." - (Financial Times service)