UK banks may be misleading investors over the true state of their financial health, the Bank of England said on Thursday, in its starkest warning yet to banks to get to grips with bad loans and ditch opaque accounting techniques in order to restore investor confidence and get credit flowing.

The BoE Financial Policy Committee, a panel of central bank officials, regulators and finance industry veterans tasked with safeguarding the stability of the UK financial system, said banks and building societies in the UK may be overstating their capital levels by failing to face up to losses on dodgy loans and by underplaying the risks associated with different kinds of assets.