Lloyds and R.B.S. Detail Plans to Increase Capital Reserves

Two of Britain's largest banks outlined plans on Wednesday to increase their capital reserves after local authorities demanded that the country's biggest financial institutions raise a combined £25 billion ($38 billion).

The banks, Royal Bank of Scotland and the Lloyds Banking Group, both partly owned by British taxpayers after receiving multibillion-dollar bailouts during the financial crisis, said they would meet the requirement by retaining earnings and selling assets.

They said that they would not have to raise additional capital in the financial markets. Their announcements were made as banks across Europe, including Deutsche Bank and HSBC, acted to bolster capital reserves in line with new accounting standards known as Basel III.

European authorities are eager to protect the Continent's financial institutions from instability caused by delinquent assets and exposure to risky trading and have outlined plans that require them to bolster their capital reserves.

On Wednesday, the International Monetary Fund said Britain should do more to fuel economic growth and be prepared to put more money into its bailed-out banks if necessary.

The I.M.F. said that some recent economic information from Britain was “encouraging” but that it did not point to a sustainable recovery soon. “Activity appears to be improving, but a slow recovery remains likely,” the fund said.

That view differs from comments by the departing governor of the Bank of England, Mervyn A. King, who said last week that there was “a welcome change in the economic outlook” and that a recovery was “in sight.”

The fund has criticized the austerity program developed by George Osborne, the chancellor of the Exchequer, saying that the British economy would recover faster if the government slowed its spending cuts and tax increases. The I.M.F. reiterated that opinion on Wednesday and called for additional public spending.

Neither Royal Bank of Scotland nor Lloyds disclosed the specific amount of capital that British regulators have demanded that they raise.

Analysts had expressed concern that the banks were two of the most vulnerable of Britain's largest financial institutions, despite years of restructuring to shed so-called noncore assets and return to profitability.

After receiving bailouts in 2008, the banks have struggled to jettison legacy assets, including billions of dollars of underperforming loans, that have weighed on financial performance.

Royal Bank of Scotland, in which the British government holds an 81 percent stake, said on Wednesday that it would meet its increased capital needs by continuing to reduce its exposure to risky assets and shrinking its investment banking unit, while also selling more assets.

Since the financial crisis began, the bank has reduced its balance sheet by more than £600 billion of noncore assets and has eliminated more than 30,000 jobs.

The bank, which is based in Edinburgh, also said it would raise additional money through the initial public offering of a stake in its American division, the Citizens Financial Group, which is planned for 2015.

“R.B.S. remains committed to a prudent approach to capital,” the bank said in a statement.

Shares in Royal Bank of Scotland rose 2.2 percent in trading in London on Wednesday, while those of Lloyds rose 2.3 percent.

Lloyds, in which the government holds a 39 percent stake, also said it would meet its capital needs by shedding noncore assets and refocusing on its main retail business.

The bank, which is based in London, added that it planned to have a core Tier 1 capital ratio, a measure of a bank's ability to weather financial shocks, of 10 percent by the end of 2014, under accounting rules outlined European Union.

Lloyds has announced several divestments, including the £400 million sale of its stake in the wealth manager St. James's Place, to raise capital.

The government may be preparing to start returning the banks to private ownership.

After years of lackluster financial performance by the two banks, their share prices have rebounded in the last 12 months as restructuring plans have taken root.

The chairman of Royal Bank of Scotland, Phillip Hampton, gave the latest indication of the bank's return to private ownership this month after he said the government's stake could start to be sold in the middle of 2014.

“It could be earlier, that's a matter for the government,” he added at the time.

The Prudential Regulatory Authority, the regulator in charge of Britain's largest banks, said on Wednesday that it was still in discussions with several institutions about their capital positions.

Recent attention has focused on the Co-operative Bank, a small British lender whose credit rating was recently downgraded to junk status because of its continued exposure to delinquent commercial real estate loans. The bank may have to raise up to £1 billion of additional capital, a recent report by Barclays analysts said.

“Banks are scraping around to raise funds to mitigate the impact of the capital requirements,” said Ian Gordon, a banking analyst at Investec in London. “The pressure has accelerated.”