The Financial Services Authority has warned British banks that they would have to face a considerable 'capital tax' if they use profits to make huge bonus-payments instead of building up capital.

The FSA said that it would force banks to use profits into boosting their financial strength.

Lord Turner, the chairman of the FSA, said, "They (large banks) need more capital to reduce the problem of them being too big to fail, and more of that capital needs to be equity capital." However, the FSA said it would not mind if the bonuses are paid in shares.

According to the FSA, risky activities like proprietary trading should hold additional capital. The City regulator also wants particular capital charge on international financial institutions.

The FSA wants to demonstrate that higher capital requirements are beneficial to the economy.

It should be noted here that many experts believe that huge bonuses, which encourage excessive risk taking, played a vital role in bringing in recent economic slump.