Investors are awaiting nervously this week's continuing health check on the UK banking sector, with the Royal Bank of Scotland set to report the biggest loss in UK banking history.

The Royal Bank's half-year deficit is forecast to be at least £1bn - with its £5.9bn of writedowns on US property-linked securities wiping out a likely £4.9bn of real profit - or three times higher than the biggest previous UK banking loss, at Barclays 16 years ago.

However, one investment bank, Merrill Lynch, says the Royal could be as much as £1.7bn in the red, if bad debts are beginning to roll.

Last week HBOS and Lloyds TSB both reported bad debts up by over 30%, while Alliance & Leicester saw its profit all but wiped out.

Sir Fred Goodwin, the Royal's chief executive who joined the bank from the Clydesdale 10 years ago yesterday, is under pressure to deliver a promised £4bn in disposals by the year-end to offset the writedowns, after tapping shareholders for £12bn of new capital in April.

Allstate, the American insurance group, was reported at the weekend to have submitted a formal bid for Royal Bank's insurance arm, which includes Direct Line with 1100 staff in Glasgow, as the deadline for second-round bids passed on Friday.

Its offer may not meet the bank's £7bn valuation, with rivals Allianz of Germany and Travelers of the US thought to be wavering and Zurich having pulled out. If the offer does fall short of Royal's valuation, it would pose a potential dilemma for Goodwin, who has signalled that a deal will be announced by next month.

Last week's £950m sale to Tesco of Royal's stake in their joint banking venture, along with last month's sale to Babcock & Brown of Angel Trains for £3.6bn, have between them raised barely £750m in real gain towards the necessary disposal proceeds.

Some smaller deals have pushed the total towards £1bn, but last month Clydesdale owner National Australia Bank pulled out of a deal to buy an investment banking business in Australia and New Zealand, valued at some £600m and acquired with ABN Amro last year - though Commonwealth Bank of Australia is now said to be interested.

However, analysts point out that the insurance arm is valued at only £3bn on the balance sheet, and sources close to the bank were hinting last week that there was "not much distance" between Allstate's and Goodwin's valuations.

Meanwhile, HSBC is today expected to write off almost $7bn(£3.5bn) in bad debts at its struggling American business, making a 30% dent in its first-half profits. Later in the week Barclays is forecast to reveal a 35% drop in profits to £2.6bn as bad debts around the world combine with further losses from its exposure to the credit markets.

Asia-focused Standard Chartered, however, is expected to report a 20% jump in profits.