The Financial Policy Committee (FPC) of the Bank of England is expected to announce today that banks currently need greater buffers to absorb future losses due to loan default and the cost of compensating customers mis-sold inappropriate financial products and also need higher risk weighting on their assets.

A report from KPMG published yesterday claimed that all of the profits made by the big five UK banks last year could be wiped out by the cost of past mistakes.

The announcement would be bad news for investors in banks, including taxpayers who own large stakes in Lloyds Banking Group and RBS/NatWest, as it means all big banks will find it more difficult to pay dividends, and the part-state-owned entities are likely to take longer to return their institutions to private hands.

Observers point out that, while this is a blow to taxpayers on the one hand, the move will benefit UK citizens overall as it will result in a healthier banking sector.

The FPC is expected to reveal how much it thinks UK banks collectively need to raise, but will not specify the amount individual banks require.

In recent weeks, Canada, Norway and New Zealand have all announced that their banks will be expected to raise more capital.

Meanwhile the Institute of Economic Affairs (IEA) has said the whole system of capital regulation should be dropped and attention focused on making it easier for banks to fail.

The IEA told the Daily Telegraph: “ Once they are forced by the possibility of failure to take responsibility for their actions, [banks] are best placed to judge their own capital requirements.”