HOWZAT

But Standard & Poor's (S&P), the ratings agency, downgraded HBOS, blaming the bank's exposure to the deteriorating economic environment.

S&P cut HBOS' long and short-term credit ratings from AA-/A-1+ to A+/A-1.

A reduction in a company's credit rating means that it becomes more expensive to borrow money as lenders increase their interest payments to cover the risk of default.

S&P said: "The rating action reflects Standard & Poor's opinion that HBOS' financial profile is less well positioned to manage the deteriorating operating environment that AA-rated global peers."

It added: "The main differentiating factor in our view is credit risk. This reflects the sizable role for both specialist and high loan-to-value mortgages in HBOS' UK mortgage book and its weaker profile corporate book. We also note that earnings may be constrained by higher funding costs, given that HBOS is less well positioned."

The Bank of England £20 billion cash injection came amid signs that UK banks are choosing to hoard cash. Its £5bn cash injection yesterday was five times oversubscribed.

Overnight, the cost of borrowing in the wholesale market rose from 5.5 per cent to 6.8 per cent —1.8 per cent above the UK interest rate.

The prospect of an imminent interest rate cut also receded today after it emerged that inflation in August rose by more than expected to 4.7 per cent. Inflation is now at same rate as in early 1992 when Britain was in the grip of recession, and above the 4.6 per cent widely expected today by analysts.

The second worst performing bank today, however, was a Swiss bank. UBS’s shares closed down 17.21 per cent at SF16.64 (£8.30), off an intraday low of 15.18 Swiss francs after the bank said the cost of closing its exposure to the collapse of Lehman Brothers would be up to $300 million (£167.9 million).

USB said it had decided to put out a statement on its exposure to Lehman after research by Bernstein suggested UBS would have to pay a much bigger price.

In Asia, where markets in Japan and Hong Kong re-opened after Monday's national holiday, the Nikkei fell by 5 per cent, losing 605.04 points to end the day at 11,609.72 — the lowest close since July 2005.

In Hong Kong, the main Hang Seng index opened around 5 per cent lower, and in Korea the main index fell by nearly 6 per cent as investors bailed out of Samsung, the country’s largest bellwether stock.

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