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By Iain Withers and Lawrence White

LONDON (Reuters) -Britain’s banks and financial firms face deepening stress from rising funding costs and worsening household finances, analysts warned on Monday, as the government battles to stem a dramatic loss of confidence among investors.

Ratings agency Moody’s said turmoil in government bond markets “jeapardizes financial stability”, putting pressure on a broad range of financial firms from pension funds to banks and other lenders.

Government bond yields spiked last month after then-finance minister Kwasi Kwarteng announced billions of pounds of unfunded tax cuts, sending mortgage prices soaring as banks raced to pass on their own increased funding costs.

Falling asset prices risk creating a “negative feedback loop” of fire sales, Moody’s warned, saying measures taken by the central bank to support the market had helped prevent this so far.

Britain’s mortgage market also faces significant stress as households struggle to meet the surging cost of home loans, investment bank Morgan Stanley said.

Between 30-40% of households on lower incomes will face difficulties paying their mortgages, with average rates on some fixed-rate products now topping 6%, the bank estimates.

New finance minister Jeremy Hunt said on Monday the government would raise 32 billion pounds a year in extra revenue, as he sought to restore investor confidence in the country’s fiscal credibility.

Despite some calm being restored to markets, the Morgan Stanley note said ahead of Hunt’s announcement that it did not expect mortgage rates to come down quickly and that volumes will flatline in 2023 instead of growing 2.5% as it had previously forecast.

Not all bank analysts have a bearish view. British banks are oversold, analysts at Berenberg said in their own note on Monday, adding that a boost to profits from rate rises would likely offset a plausible increase in loan losses.

Britain’s banks are due to report their third-quarter earnings next week.

Investors are already questioning whether banks’ risk models are up to the task of identifying which home loans may turn sour when unemployment is low but household budgets are nonetheless being squeezed, Reuters reported last week.

The country’s bank shares have swung wildly since the Sept. 23 fiscal announcement, with Lloyds down 10%, against a 1.7% fall in the benchmark FTSE 100 index.

(Reporting by Iain Withers and Lawrence White, Editing by Bernadette Baum)

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