REGULATORS need to provide greater clarity on bank capital rules before the Government sells more shares in the part-nationalised institution with a pre-election divestment of Royal Bank of Scotland unlikely, according to Standard Life Investments executive David Cumming.

Meanwhile, banks have been warned by ratings agency Moody's that the expense of completing a Bank of England stress testing programme could put them under "significant financial pressure".

The Treasury sold its first £3.2 billion tranche of shares in Lloyds Banking Group, owner of Bank of Scotland, last month.

But 81% taxpayer owned RBS, under new chief executive Ross McEwan, is awaiting the results of an investigation into whether it should be split into good and bad banks.

Mr Cumming, head of global equities at Edinburgh-based SLI said this outcome is "extremely unlikely".

Instead he expects a formal "bad bank" to be created within RBS.

Referring to Bank of England Governor Mark Carney, Mr Cumming said: "I think we need to see more clarity, particularly on the capital front, particularly from Carney before the Government tries to offload more bank shares, RBS or otherwise."

A strong capital cushion allows banks to absorb losses from the likes of bad debts.

Mr Cumming told the BBC that there is "no chance" of a sale of RBS shares before the General Election due in 2015.

"I think there's still quite a lot to do," he said, noting the scaling back of the investment bank under pressure from the Government and ongoing conduct investigations by regulators.

SLI is currently underweight in RBS shares with a 0.5% stake.

The challenges facing the banking sector were underscored by a report published by ratings agency Moody's warning that a round of stress testing planned by the Bank of England next year could put "significant financial pressure" on UK banks.

"Some UK banks might see their IT expenses soar by up to 20% to 30% between now and 2015," said Moody's Analytics managing director Alessio Balduini.

The state of the UK banking sector will be revealed in the coming days as institutions, led by Lloyds today, update investors on the third quarter of their financial years.

Ian Gordon, analyst at Investec, said: "Lloyds is, we believe, in very good shape."

He tipped the bank to announce rising revenues, increased margins and a further fall in loan impairments.

But he downgraded his stance on the stock from "buy" to "hold" after recent sharp rises.

The strong performance of Lloyds's shares is good news for Lloyds's chief executive Antonio Horta-Osorio who is in line to pick up a £2.5 million bonus if they continue their current run. He is due a windfall of more than three million shares if Lloyds' share price remains above 73.6p - the level the Government paid to bail out the bank in 2008 - for at least 30 consecutive days.

It has been ahead of this level for more than three weeks now despite closing down 0.75p or 0.9% at 79.62p last night.

Figures from accountant PricewaterhouseCoopers indicated that the burden of bad debts on UK banks is falling. UK banks sold non-core loans with deals worth €13 billion (£11bn) in the year to date.

PWC partner Richard Thompson said: "We are seeing extremely high levels of competition in the market at the moment.

"Whilst the major US funds are the most active, we are seeing increased interest from other sources, including sovereign wealth funds and far eastern investors."