The scale of the capital shortfalls of each of Britain's major banks is expected to be revealed by the banking regulator on Thursday amid mounting speculation that the big eight players could have been ordered to find up to £27bn to plug gaps identified by the watchdog.
Sir Mervyn King, outgoing governor of the Bank of England, said in his Mansion House speech on Wednesday night that the announcement by the Prudential Regulation Authority was "another step in dealing with the legacy of the past".
"It will make our banking system more resilient and better able to support recovery," King said, rebutting claims that forcing banks to hold more capital was impeding their ability to lend. In March the PRA had indicated that the sector had a shortfall of around £25bn although this figure is thought to have risen slightly.
Only three banks have disclosed publicly that they have appeased the PRA. However, the bailed-out Royal Bank of Scotland and Lloyds Banking Group have not disclosed their shortfalls while the Co-operative Bank said on Monday said it would list its shares on the stock market as part of an effort to raise £1.5bn.
King, in his last speech as governor of the Bank, said the banking system was an obstacle to recovery and that "lending remains lacklustre".
Speaking after the parliamentary commission on banking standards called for new rules to jail bankers and to clamp down on bonuses, King called for a "great degree of responsibility by all involved: the leaders of our banks, regulators and consumers. We must restore trust in our banking system."
The proposals by the commission to defer bankers' bonuses over 10 years were met with some scepticism by City watchers. "Deferral has a role to play in creating more sustainable pay practices, but too much focus on deferral is misguided," said Tom Gosling, head of PwC's reward practice.
"It's more important to focus on what people are getting paid for than how they are getting paid. With less deferral it's possible to pay people less in the first place."
Doubts also surfaced about whether the report would lead to rapid change. Lord Myners, a city minister under the previous Labour government, told BBC Radio 4 that the banking commission had recommended so many further reviews that little would change in the next two years.
But as the government indicated that it would make changes to introduce criminal sanctions for reckless misconduct into the banking reform bill going through parliament, John Cridland, director general of the Confederation of British Industry, said "tough criminal sanctions" for those who commit fraud were already on the statute books.
"Enforcing those must come before the introduction of new sanctions," he said.
Lydia Prieg, banking researcher at the New Economics Foundation, said judicial sanctions alone were unlikely to change behaviour in Britain's banks.
"At the height of the boom most bankers were not deliberately engaging in wrongdoing, they simply suffered from group-think." She said it was disappointing that the commission had not recognised the importance of institutional structures in creating culture. " Banks owned on the stock market will always have a tendency to engage in risky behaviour."
The Local Authority Pension Fund Forum called for a review of the way accounting rules are operated. Current international rules allow banks to wait until customers are close to defaulting before taking a hit to their accounts while the LAPFF said this contradicted UK laws requiring a true and fair view of profits."These are extremely significant issues, given that they directly affect the accounting practices of systemically important financial institutions, and in turn affect the decisions made by those institutions," LAPFF chairman Kieran Quinn.
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