After Northern Rock, who else is vulnerable? The stock market has been swift in reaching its own conclusion.

Since the middle of July, when turmoil in the credit markets first seeped through to equity markets, shares in Alliance & Leicester have fallen 36 per cent. Those of Bradford & Bingley are down 27 per cent, with HBOS, the owner of Halifax, off 19 per cent. Paragon, the specialist buy-to-let mortgage lender which will issue a trading update tomorrow, has fared even worse, losing 42 per cent of its value.

The severity of that latter drop is readily explained. Having no base of depositors, Paragon relies wholly on the wholesale money markets for its funding - raising the prospect that, should the credit markets remain shut, it may have to halt lending early next year once its current funding expires.

So what of the rest? The stock market is correct in identifying A&L, B&B and HBOS as the three former British mortgage lenders other than Northern Rock most reliant on wholesale funding.

B&B has a loan-to-deposit ratio, which serves as a rough proxy to reliance on external funding, of more than 200 per cent, according to Citigroup, with those at HBOS and A&L sitting at around 180 per cent and 170 per cent respectively.

But funding costs aside, investors have other concerns. Growth in mortgage volumes for the remainder of this year and next will clearly slow, while repossessions are likely to rise.

There are also stock-specific issues. Aside from having a high exposure to buy-to-let lending, B&B draws a significant tranche of its mortgage volumes from originators, such as GMAC and Kensington, who are reliant on the wholesale markets. Elsewhere, HBOS is likely to be hurt by a reduced ability to realise gains from its corporate loan portfolio.

At the same time, there will be relative winners from Northern Rock’s woes. A lot of the retail deposits withdrawn from the Tyneside lender are expected to flow to Halifax, which has been aggressively pulling in savers with attractive rates. HBOS’s loss of market shares in mortgages earlier this year may also, in retrospect, be seen as a good thing.

What is clear, however, is that near-term profits from the British mortgage banking sector are becoming increasingly harder to forecast. As HSBC found out to its cost in the US, the most detailed computer modelling techniques are often of little use in predicting how borrowers behave under duress. As long as bencmark interbank interest rates maintain their eye-watering premium over base rates, the sector should be avoided.

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