British banks will have to raise £20 billion to £50 billion of new capital or dramatically restructure their businesses after the Bank of England made it clear it did not trust the way they value their books.

The Bank of England’s new financial policy committee yesterday said banks must report capital ratios which reflect a “proper valuation” of their assets and a “realistic assessment” of the cost of recent scandals such as the manipulation of Libor and mis-selling of insurance products.

The demand comes shortly after the IMF called on European lenders to shore up balance sheets and adds to growing concerns that risk-weighted capital ratios are exaggerating the health of the global banking system.

Sir Mervyn King, Bank of England governor, declined to quantify the level of capital needed to rectify the situation, saying only that it was “material”. However, the central bank’s financial stability report published estimates of each of its concerns that suggested banks would have to raise between £20 billion and £50 billion in aggregate.

The Bank of England has instructed banking supervisors to begin working on the tougher approach immediately and banks could be expected to identify how they will meet any capital shortfall early next year.

Bank of England officials said that while the capital requirements differed from bank to bank, some lenders would need to raise capital or restructure their businesses.

“It is important to keep this judgment in perspective,” Sir Mervyn said. – Copyright The Financial Times Limited 2012