Banks should make plans based on the assumption the economic downturn could be as bad for them as the recession in the 1990s, the City watchdog has said.
The warning from FSA chief executive Hector Sants comes a year after the credit crunch began.
Mr Sants also said he had put pressure on most of the UK's big banks so that they raised billions in new capital.
That was so they would be robust enough to withstand the potentially severe financial pressures ahead, he said.
Pressure to raise capital Live text: Rangers v FBK Kaunas ...
Talks to resume in Shell dispute ...
The recession and property market downturn of the early 1990s saw British banks suffer debilitating losses over an extended period.
On Friday it was reported that repossessions had risen sharply and that one bank, Royal Bank of Scotland, had posted the second-biggest loss in UK banking history.
In an interview with BBC business editor Robert Peston, Mr Sants was asked whether the difficulties for banks could be as bad as they were in the early 1990s, and whether losses on lending would continue to be a problem for up to three years.
He replied that he would expect banks "to plan on that type of assumption".
He said he had expressed his opinions "fairly forcibly" to banks that they needed to raise capital, so that they could be confident of weathering the economic downturn.
Royal Bank of Scotland, Barclays and HBOS have between them raised Ј20bn of new equity capital.
Excessive risks
The credit crunch happened when banks stopped lending to one another, and to their customers, with anything like the ease of previous years.
Mr Sants said part of the cause of the economic mess was that bankers had been rewarded for taking foolish risks.
And he warned that if banks continued to reward their employees for doing dangerous deals, the watchdog would make sure that banks and their shareholders would be penalised.
He said there would be "consequences" for banks that pay employees too much for doing imprudent deals.
The full interview, which was arranged to mark the anniversary of the start of the credit crunch, will be broadcast at 2230 BST on the News Channel series, Leading Questions.
(BBC)
<< Back