UK banks need to raise balance sheets

Analysts said banks across Europe may have to boost their capital by up to €120bn in order to bring credit default swap (CDS) spreads down to "acceptable levels" and spark activity in the debt markets. CDS are a form of insurance on bonds that help offset the risk that a borrower will default on payments to an investor. The cost of this insurance is measured in basis points - hundredths of 1pc. For example, a credit default swap trading at 100 basis points would imply an annual cost to insure £10m worth of bonds at £100,000. The default insurance costs for part-nationalised lenders such as Royal Bank of Scotland and Lloyds Banking Group have spiked to all-time highs in recent months as fears about the health of the sector continue to grow. According BarCap, RBS's CDS currently trade at about 316 basis points. In order to bring this down to an "acceptable" 150 points, the bank would need to raise €11.08bn in capital, about a third of its current market value.