British banks forced into line over Treasury plan to boost reserves

Stronger banks initially rejected need for further capital raisings

Britain's banks remained divided almost to the last yesterday on plans for a massive government recapitalisation of the industry but were eventually forced to accept that the initiative was inevitable. The boost to shore up confidence in the sector is set to be announced today. The move could be combined with new measures from the Bank of England to increase liquidity and get banks lending again.

Barclays has consistently insisted that its capital position is strong enough to withstand market and economic pressures. John Varley, the bank's chief executive, said publicly yesterday that Barclays "has not requested capital from the Government and has no reason to do so".

But Royal Bank of Scotland, whose shares were battered yesterday, is thought to believe that the market now requires higher core capital ratios to feel secure about banks. Sir Fred Goodwin, the bank's chief executive, echoed Mr Varley's statement, but did not say RBS had no reason to seek fresh capital. In the end, Barclays too told the Treasury it would accept the idea.

Britain's banks have this year already raised more than £20bn of capital – the reserve buffer that banks hold to absorb losses. But the increased safety buffers have not put an end to investor fears for the sector.

Lloyds TSB reiterated its intention to boost its capital ratios, which will be depleted by the bank's planned takeover of HBOS later this year. The bank has said it has a number of options, and could be open-minded about a government injection.

A number of banks insist that lack of liquidity and not capital is the real reason for plunging confidence in the industry. They also said corporate customers were not leaving their money on account for longer than overnight, leaving banks short of long-term cash.

HSBC, which only makes about a quarter of its profit in the UK, is believed to be less enthusiastic than some of its rivals about government bailouts but will not be forced to join. The global bank has used its strong balance sheet to step up lending and gain deposits in the UK during the credit crunch.

Even those banks who do not think they require extra capital decided in the end they would accept the plan if it brings wider stability to the sector. Cazenove analysts said government injections of £26bn to £33bn would be enough to restore confidence. They said the Government should seek agreement by the European Union to establish a target level for capital to prevent countries bidding the ratio higher.

HBOS is in talks to sell its BankWest Australian business to Commonwealth Bank of Australia for A$2bn (£821m). Collins Stewart analysts said the price was well below the £3bn hoped for, but that a sale would be welcome.