The Financial Policy Committee, set up last year to spot potential risks building in the financial system, said it was "concerned" banks were not holding enough capital - despite already being the best capitalised in Europe - and said they should raise more "as early as feasible."
The industry reacted with dismay at the FPC's comments, with one analyst branding them "barking mad" and others warning it could hinder growth by further limiting lending.
In a statement released following its meeting on March 16, the FPC said that while banks had made progress in building capital by keeping down pay, dividends and share buy-backs, more needed to be done.
"The Committee remained concerned that capital was not yet at levels that would ensure resilience in the face of prospective risks and noted that the ability to make further progress via greater restraint of cash distributions was limited.
"It therefore advised banks to raise external capital as early as feasible," it said.The FPC did not give any indication of how much in additional funding banks would need, nor did it specify the means by which it could raise the money, but one of the options would be calling on shareholders for funds through rights issues.
The taxpayer could be on the hook if state-backed Royal Bank of Scotland of Lloyds Banking needed to go down this route.
The FPC's statement received a hostile reception in the City, with Ian Gordon, banking analyst at Investec, describing the suggestion that UK banks require additional capital as "barking mad".
"No UK bank is going to issue fresh equity to raise capital levels. In complete contrast to pre-crisis, UK banks have capital ratios that are strong in absolute terms and strong in relative terms compared with their European peers."
The British Bankers' Association said: "UK banks have already done a great deal in order to recapitalise and are already well placed to withstand future crises.
They have already restructured and raised additional capital and are well on the way to meeting Basel III requirements".
"We have always recognised the need to raise capital to help ensure a stable banking system but there must be a careful balance between capital held on the one hand and having funds available on the other to support business and growth."
Under Basel III international regulatory standards, all banks will be required to have a core capital ratio of 7pc by 2019, to ensure they are protected against losses. Royal Bank of Scotland's core capital ratio was 10.6pc at the end of December.
Mr Gordon said there seemed to be a collective current view among UK regulators that "no amount is too much" in terms of capital requirements.
"We're talking about deliberately depressing returns on equity for no economic reason. No sane person running a bank is going to voluntarily take this course of action."
The FPC cannot compel banks to raise capital at this stage, because it will not have statutory powers until next year. At that point, banks will be legally required to comply with the regulator's demands.
The committee said that while "some of the tensions" engulfing the eurozone had lifted, banks with exposures to the most highly indebted countries would have a particular need to build capital. It said it would review the situation at its next meeting in June.
It stopped short of calling for powers to be able to dictate maximum loan-to-value or loan-to-income mortgages, saying that more would need to be done to get public backing.
Andrew Tyrie, MP, chairman of the Treasury Select Committee, accused the FPC of ducking its responsibilities and "lacking confidence" on the matter.
telegraph.co.uk
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