Britain’s banks must raise £25 billion €30 billion) of extra capital by the end of the year to absorb any future losses on loans, the central bank said - less than investors had expected.

Replenishing banks’ capital buffers, decimated by the financial crisis and heavy fines for misconduct, is a crucial step for returning part state-owned lenders RBS and Lloyds to full private ownership by the 2015 general election.

Bank of England governor Mervyn King said the move announced yesterday to strengthen banks should also allow them to lend more and support economic growth.

He said plugging the capital shortfall was “manageable” and that the banks would not need taxpayers’ money.

But UK business minister Vince Cable said forcing banks to raise capital will prolong the time it takes for the economy to recover by further depressing already weak lending to small businesses.

Dominate the market
The central bank said major lenders should achieve a core tier 1 capital ratio – a bank's main benchmark of health – of at least 7 per cent of their risk-weighted assets.

RBS and Lloyds and two other banks, HSBC and Barclays, dominate the market with 74 per cent of deposits.

Shares in RBS were down 2.6 per cent while Lloyds jumped 2.8 per cent, with Barclays up 0.6 per cent and HSBC flat.

Analysts expect banks to raise the money by continuing with measures such as curbing dividends and bonuses and selling assets, although some new capital may be needed. Banks will have to hold a set amount of capital so they are not tempted to cancel loans to bump up their capital ratios.

Those holding risky commercial property or are exposed to struggling euro zone countries will have to hold even more capital above the 7 per cent target.