The mushrooming cost of paying compensation to victims of Payment Protection Insurance mis-selling is leaving banks with inadequate resources to absorb possible future losses.
The Bank of England's governor, Sir Mervyn King, warned today that banks needed to raise more capital, partly because of the PPI bill which has reached nearly £13bn and is expected to rise higher.
A statement from the Bank's Financial Policy Committee said UK banks have "underprovisioned for costs for conduct redress, notably for payment protection insurance mis-selling."
"In 2012, the number of identified conduct issues has grown and it seems likely that banks could face additional sizable costs."
The Committee said that likely losses on bad loans and over-optimistic calculations of capital adequacy were also to blame for the fact that banks had too little set aside to be sure of coping with future financial problems.