RATINGS agency Moody's has upgraded its outlook on the UK banking system to "stable" from "negative" as they build the strength to withstand another crisis.

But it led to shares in top UK banks to fall.

Moody's changed its stance to reflect an "increasing stable economic outlook" for the UK.

The agency said bad debts on commercial property loans were improving, and funding and liquidity for institutions was improving.

Regulators have insisted that banks beef up their capital cushions, calculating last month that the aggregate capital shortfall at five leading UK banks at the end of 2012 was £27.1 billion.

Johannes Felix Wassenberg, Moody's managing director for banking, said: "Overall, we believe that UK banks are sufficiently well-capitalised to absorb expected losses from both our central and adverse stress scenarios.

"Once the large UK banks execute their capital plans to address the additional capital buffer requirements recently imposed by the Prudential Regulation Authority, Moody's believes UK banks will be well capitalised for the risks they face and will compare favourably to their European peers."

However, shares in Edinburgh-based Royal Bank of Scotland closed down 3.1p or 1% at 301.3p. Lloyds Banking Group, owner of Bank of Scotland, finished off 0.25p or 0.4% at 66.1p. Shares in Barclays, HSBC and Standard Chartered also fell.

Mr Wassenberg said Moody's had a negative outlook on debt and deposit ratings of top banks as it felt UK authorities would continue to take steps to cut the level of systemic support over the medium term.