US banks have started refusing to lend money against hedge funds’ sub-prime credit portfolios.

In recent days Bank of America and Countrywide are said to have cut off lending to funds that use credit portfolios, including mortgages, collateralised debt obligations and sub-prime securities, as collateral. The highly leveraged funds now rely heavily on their prime brokers for borrowing.

There is no evidence that prime brokers have reduced such lending, although they have recently lifted their requirements for margin lending, contributing to forced selling as funds have to meet margin calls.