Britain`s banks are close to revealing writedowns of at least £40bn as the financial crisis looks to be entering a dangerous new phase following a huge sell-off in the shares of Barclays and other banks on Friday. The government is close to unveiling fresh measures to shore up the system.

The write-off estimates come from City of London broker FPK, but they probably underestimate the damage from the global financial meltdown as some debt provisions are buried in bank profit-and-loss accounts and never openly declared.

Some forecasts from the City, as the British capital`s financial district is known, suggest that bad loans and investments from all the banks combined could top £200bn — and these could be ring-fenced by the state under the terms of the latest rescue package that may be announced by the government.

FPK`s estimates relate to numbers that will be disclosed when financial institutions announce their 2008 figures from the middle of next month. Similar figures are believed to have been pencilled in by forecasters at Morgan Stanley and Credit Suisse.

The damage, which includes about £15bn of bad loans unveiled at the half-year stage, is caused by toxic assets linked to the credit crunch, a rising tide of bad debt as homeowners default on their loans, as well as new provisions arising from the collapse in the autumn of Lehman Brothers and a number of Icelandic banks.

Writedowns at HSBC are thought to have topped £15bn last year. RBS and HBOS are close behind at £13bn and £11bn respectively.

Shares in major British banks fell sharply at the end of last week with Barclays down 25 per cent at 98p amid fears that institutions will need more government money, and that previous writedowns do not reflect plummeting values.

City shareholders who support the idea of the government setting up a “bad bank” to buy up tens of billions of toxic assets are hopeful that such a move could re-start bank lending to small businesses and mortgage borrowers. One said “But if they go for it, they shouldn`t do it by halves — it should be a kitchen-sink job, with hundreds of billions ring-fenced.”

The US is also considering setting up a toxic bank, say sources.

Vince Cable, the opposition Liberal Democrat`s respected treasury spokesman, said that while he wasn`t against the idea of setting up a “bad bank”, “it remains to be seen whether such a move would get credit circulating again”. Cable also criticised Barclays, saying he didn`t know why the share price had fallen, but that Barclays, “more than any other leading bank, was cutting back on lending to British customers, tightening credit and imposing harsher terms for loans”.

On Friday, Barclays issued a statement after the market closed saying it knew no reason why its shares fell, and declared that its profit for last year was better than expected at £5.3bn after write-offs. A well-placed source added that the bank was on course to reap benefits from its takeover of the US arm of Lehman after it filed for bankruptcy in September.

— The Guardian, London