Britain's banks will have to raise 13 billion pounds ($20.4 billion) of extra capital and meet a new cap on lending ahead of international peers as the Bank of England seeks to curb risk in the financial sector.
The combined balance sheet of Britain's largest banks is five times the size of the economy, despite radical restructuring since the crash in 2008, and the country's central bank fears some of them are still too big to fail.
Privately bankers complain that higher capital requirements and limits on leverage are hampering their ability to lend, but outgoing Bank of England governor Mervyn King told London's financial elite this week it was wrong to blame higher capital levels for weak lending.
Some analysts however said there was merit to their complaints. "It's that continuing theme - putting pressure on banks to build up more reserves ... and, on the other hand, turn around and say they've got to lend more," said Chris Williamson, chief economist at Markit.
"This is simply going to add to pressure on banks to scrutinize ever more carefully their lending," Williamson said.
The Prudential Regulation Authority (PRA), the Bank of England's new banking regulator, said on Thursday there was an aggregate capital shortfall of 27 billion pounds at the end of last year at Royal Bank of Scotland (RBS) (RBS.L), Lloyds Banking Group (LLOY.L), Barclays (BARC.L), Co-operative Bank (CPBB_p.L) and Nationwide Building Society.
The five have already outlined plans to bring the gap down by 13.7 billion pounds and the rest will be raised via disposals, restructurings and retained earnings.
Part-nationalized RBS accounted for just over half of the shortfall, some 13.6 billion pounds, underscoring the challenge facing Prime Minister David Cameron as he seeks to sell down the state's 81 percent stake in the bank.
Lloyds had an 8.6 billion shortfall but has announced plans to raise 5.8 billion and said it expects to meet the additional requirement without needing to issue hybrid debt or shares.
While the government is ready to start selling its 39 percent stake in Lloyds, Finance Minister George Osborne has admitted a sale of the RBS shares was a long way off. He said he would review the possibility of splitting RBS, putting its toxic property loans into a so-called "bad bank".
Many people, including Osborne, have said previously creating a bad bank for RBS would be too costly.
Britain is determined to avoid a repeat of the 2007-09 financial crisis, with King, in his last major address to London's financial elite late on Wednesday, describing purging the City of London of overly large banks and reckless bankers as "the work of a generation".
During the boom, bankers attending the annual banquet in London's Mansion House were toasted for their work, but this year, in the wake of a global scandal over interest rate rigging centered on the benchmark London Interbank Offered Rate (Libor), they were warned they risked jail for reckless behavior.
Former UBS (UBSN.VX) and Citigroup (C.N) trader Tom Hayes appeared in court on Thursday accused of conspiracy to defraud in connection with the Libor scandal.
While Euro zone countries are trying to forge a banking union overseen by the European Central Bank to help shield taxpayers from future crises, Britain is imposing some of the strictest rules on risk to help insulate its citizens.
Britain's banks will have to meet a core Tier One capital ratio of 7 percent by the end of this year, compared with a global deadline of 2019, and King said they would face regular stress tests, starting next year.
In Europe, only Switzerland has a tougher regime, requiring its banks to have a core Tier One ratio of 10 percent by 2019. The Swiss government said on Thursday it would demand banks hold additional capital against their mortgage books.
The leverage ratio measures capital against total loans, not adjusted for their supposed riskiness, and some bankers argue it penalizes low-risk, high-volume businesses like trade finance and mortgage lending, crucial to economic growth.
The PRA said Barclays and Nationwide fell short of the required level, with leverage ratios of 2.5 percent and 2 percent respectively after adjustments. It said they must submit plans by the end of this month to reduce leverage.
Barclays and Nationwide were the only two whose net UK lending was more than 1 billion pounds in the first quarter. Barclays said its restructuring plans include a reduction in leverage "over time".