The Bank of England has taken its most intrusive step yet to regulate Britain's financial system, ordering an audit into whether banks are overstating the health of their balance sheets.
The Bank's Financial Policy Committee has asked the Financial Services Authority to go into the major UK banks and determine whether their capital positions are really as healthy as they publicly declare.
The Bank said that the country's four largest banks could need up to £35bn in extra capital because they had understated the riskiness of the assets they hold on their balance sheets.
It added that the proportion of capital banks hold - which is regarded as the key bedrock to their financial stability - could also be distorted upwards because they overestimate the future value of their assets conduct costs and underestimate future conduct costs from Payment Protection Insurance and other activities.
The Bank's Governor, Sir Mervyn King, said that the FSA would "take action to ensure that the capital of UK banks and building societies reflects a proper valuation of their assets".
Although he denied that the Bank was implying that banks had fiddled their accounts to escape regulation, the announcement will likely spark criticisms that institutions are manipulating their accounts to flatter their balance sheet positions.
But while British banks will potentially need tens of billions of pounds of extra capital, Sir Mervyn revealed that the Treasury had refused to countenance any possibility that the Government itself would have to provide any of that money - in other words, further nationalising the banks.
At the FPC press conference, Paul Tucker, the Bank's Deputy Governor for Financial Stability refused to answer whether he would serve out the remainder of his term (which runs until February 2014), having been overlooked in favour of the incoming Governor, Mark Carney.
Mr Tucker said: "I'm the deputy governor for financial stability there's a job of work to be done. I'm doing it."
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