Mervyn King, the Bank’s governor and head of its Financial Policy Committee (FPC), also called on the FSA to take action to ensure the UK banking sector has put aside a realistic buffer against risk.
In the latest edition of the Financial Stability Report, the Bank said progress in raising new capital has slowed in recent months and warned this could damage investor confidence.
Supporting this, the report noted that market value of major UK banks’ shareholder equity has fallen on average to around two-thirds of the book value.
"Market concerns are likely to reflect in part uncertainty about bank capital adequacy. One factor which may make stated levels of capital misleading is underrecognition of expected future losses on loans," the Bank said.
"Information from supervisory intelligence and banks’ own public disclosures suggest that expected losses on loans, including those subject to forbearance, are in some cases greater than current provisions and regulatory capital deductions for UK banks’ expected losses."
The paper also argued that the UK’s four biggest banks – Barclays, RBS, Lloyds and HSBC – would need to raise between £5bn and £35bn in new capital to address the issue of "unstated" potential losses.
Presenting the report, King said: "The FPC therefore recommends that the FSA takes action to ensure that the capital of UK banks and building societies reflects a proper valuation of their assets, a realistic assessment of future conduct costs, and prudent calculation of risk weights.
"Where such action reveals that capital buffers need to be strengthened to absorb losses and sustain credit availability in the event of stress, the FSA should ensure that firms either raise capital or take steps to restructure their business and balance sheets in ways that do not hinder lending to the real economy."