Regulator tells Barclays, Lloyds and RBS to plug £27bn hole in finances

The scale of the challenge facing policymakers to return Lloyds Banking Group and Royal Bank of Scotland to private ownership became clearer today as the banking industry was told to raise another £13.4 billion.

The City’s financial watchdog said four of Britain’s largest banks and building societies needed to raise the new capital to strengthen their balance sheets. The banks have been ordered to find the cash without cutting lending.

The Prudential Regulation Authority said the banks had a £27.1 billion shortfall at the end of 2012, up from a £25 billion earlier estimate, but this has halved because of actions taken by lenders so far this year.

Worryingly for Chancellor George Osborne, Lloyds, which is 39 per cent taxpayer-owned, has an outstanding shortfall of £7 billion according to the PRA, while 81 per cent state-owned RBS needs to find another £3.2 billion.

The report was published just hours after Osborne used his annual Mansion House speech to confirm Government plans to sell its stake in Lloyds — almost certainly in a placing to institutional investors later this year. However, a privatisation of RBS still seems some way off, with the Chancellor claiming he did not want “a quick sale” and would only do so when the bank was “fully able to support our economy”.

The PRA, led by Bank of England Deputy Governor Andrew Bailey, pictured, said banks will need to have capital buffers equivalent to at least 7 per cent of their risk-based assets by the year end.

One source close to Lloyds described its £7 billion figure as “misleading” because it did not fully take into account billions of pounds’ worth of disposals announced since the turn of the year, including wealth manager St James’s Place. In a statement the bank, which is also expected to benefit from a £1 billion dividend from its Scottish Widows unit, said it was already three quarters towards the PRA target and would have it covered before the year end.

RBS said it expected to have the shortfall down to £400 million in December and would raise the rest in 2014 as agreed with the regulator. Barclays will need to find another £1.7 billion in capital, which it said it will do “organically”, and Nationwide’s £400 million gap will be covered by existing plans.

The Co-op Bank had already owned up to a £1.5 billion shortfall while HSBC, Santander UK and Standard Chartered were given the all clear. Experts warned that banks were being swamped by regulation and capital requirements. Only yesterday, the industry was facing calls for a radical shake-up from the Parliamentary Commission on Banking Standard, which could see bankers jailed and bonuses delayed for up to 10 years.

Kevin Burrowes, UK financial services leader at PricewaterhouseCoopers, said: “Despite the fact that many banks have already made significant investment and progress to ensure their compliance, there remains a growing sense of concern among both regulators and analysts over banks’ overall capital levels.”