An economic downturn to match the one which hit the UK in the early 1990s ought to be at the forefront of the planning being done by Britain's beleaguered banking sector, the chief executive of the City watchdog has said.

According to Hector Sants, head of the Financial Services Authority, the pressure he applied on the main players to raise finance was to ensure that they could stand up to the uncertain financial future.

Banks such as Barclays, Royal Bank of Scotland and Halifax Bank of Scotland were required to raise billions in capital from shareholders to bolster their balance sheets and absorb the impact of the sub-prime blows they have taken in the credit crunch.

The credit crunch happened when banks began to suffer heavy losses by lending to people who could not meet their repayments. As a result they stopped lending to each other, and their customers, with anything near the ease of recent years.

House prices have tumbled as mortgage debt dries up, while banks keen to hoard cash have passed on their pain to borrowers by hiking lending rates.

The UK is now said to be on the verge of recession as the moribund property market cripples consumer confidence - with motorists and businesses also feeling the heat from surging inflation while demand withers away.

Asked by the BBC whether the difficulties for banks could be as bad as they were in the early 1990s, Mr Sants said 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.

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.

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