Banks 'must be ready for recession'

Hector Sants, chief executive of the Financial Services Authority, said he had put pressure on many of the country's biggest banks so that they raised billions in new capital to ensure they were robust enough to withstand the financial pressures ahead.

Many of the UK high street's biggest names - such as Barclays, Royal Bank of Scotland and Halifax Bank of Scotland - have been forced to raise billions of pounds in extra capital from their shareholders to shore up finances and absorb the impact of the sub-prime blows they have taken in the credit crunch.

The credit crunch happened when banks began to suffer heavy losses by lending to people who could not meet their repayments. As a result they stopped lending to each other, and their customers, with anything near the ease of recent years.

House prices have tumbled as mortgage debt dries up, while banks keen to hoard cash have passed on their pain to borrowers by hiking lending rates.

The UK is now said to be on the verge of recession as the moribund property market cripples consumer confidence - with motorists and businesses also feeling the heat from surging inflation while demand withers away.

June saw the biggest jump in unemployment claimant count since the aftermath of the last recession in 1992 and some economists have predicted a 250,000 rise in jobless totals.

Asked by the BBC whether the difficulties for banks could be as bad as they were in the early 1990s, he said he would expect banks "to plan on that type of assumption".

He said he had expressed his opinions "fairly forcibly" to banks that they needed to raise capital, so that they could be confident of weathering the economic downturn.

Mr Sants said part of the cause of the economic mess was that bankers had been rewarded for taking foolish risks. And he warned that if banks continued to reward their employees for doing dangerous deals, the watchdog would make sure that banks and their shareholders would be penalised.