The UK's four largest banks have a capital shortfall of some £37bn, analysts at investment bank JP Morgan said yesterday, with Royal Bank of Scotland and HBOS the worst positioned.

Royal is facing a capital shortfall of some £13bn, HBOS £11bn, Barclays £8bn and Lloyds £4bn, according to their analysis. The figures, which were based on estimated 2009 earnings, come ahead of detailed banking regulations expected to be published this year that are anticipated to focus on the need for strong capital cushions at financial institutions. This implies that the fundraising being planned by Royal Bank could be followed by similar exercises at the other banks.

"If the banks do nothing then shrinking balance sheets could imply 25% to 35% loss of earnings for the sector, according to our analysis," report author Carla Antunes da Silva said.

HBOS, she reckons could face a 34% hit to earnings in 2009 and Royal Bank 26%, while Barclays 25% and Lloyds TSB 24% would fare much better.

She added: "From a UK economy point of view, the option of doing nothing by the UK banks is clearly no longer feasible but the extent to which the banks will strike a balance between the need to strengthen balance sheets in an environment where there will be a permanent need for more capital and the ability to grow lending will be key to our investment decision.

"We believe that UK banks should err on the side of begin conservative and see this as an opportunity to correct their major structural weakness."

The analysts also suggested that banks could consider paying part of their dividends in shares, a practice already pursued by HSBC.

"Such an approach could also be an opportunity to lower unsustainably high levels of pay-out."

The comments from JP Morgan came as Collins Stewart analyst Alex Potter tipped Barclays to follow Royal Bank in a rights issue. He said that Barclays could see further writedowns of as much as £6bn after announcing £1.6bn at the year end.

He said that Barclays could require around £8bn in additional capital and has little in the way of easily sellable assets to soften the blow.

Potter reckons that HBOS would be next in line to issue equity but anticipates it making further writedowns of just £873m this year.