Royal Bank of Scotland faces taking a bigger hit from the alleged fraud perpetrated by US businessman Bernard Madoff than it lost from the collapse of energy giant Enron, it emerged yesterday.

It was among several British banks to admit to potential losses running into hundreds of millions of pounds following the arrest of the US investor on suspicion of fraud last week.

Royal Bank told investors yesterday it faced a potential £400m loss from trading and loans to funds of hedge funds investing in Madoff funds.

"If, as a result of the alleged fraud, the value of the assets in these hedge funds is nil, RBS's potential loss could amount to approximately £400m," the bank said in a statement.

This exceeds the £316m that Royal Bank sought to reclaim from Enron when the energy trader collapsed in 2001. Royal Bank was unable to confirm its total losses from Enron when contacted yesterday.

Royal Bank's position potentially affects taxpayers as well, since the bank is now 58% state-owned. Its shares closed down 2.125p, or 3.7% yesterday at 54p. The government bought £15bn of shares at 65.5p during Royal's fundraising last month.

But Royal is not the only bank to suffer problems caused by the arrest of Madoff, who had received $50bn (£33bn) from investors and seemingly generated double-digit returns until recently. It is alleged that he used money from new investors to pay the returns to existing clients, in effect a so-called "pyramid scheme".

HSBC is even more exposed than Royal Bank, confirming yesterday it "has provided financing to a small number of institutional clients who invested in funds with Madoff".

It added: "On the basis of information presently available, HSBC is of the view that the potential exposure under these financing transactions is in the region of $1bn (£660m)."

It said that other clients had invested with Madoff but their positions should not affect the company.

Spain's largest bank Banco Santander, owner of Abbey, Alliance & Leicester and Bradford & Bingley in the UK, revealed that one of its funds has 2.33bn (£2.1bn) invested in Madoff funds. It is not yet clear whether Santander itself will pick up the tab as the company emphasised yesterday that the assets invested belong to the fund's investors.

Barclays is thought to have just "minimal" exposure to the company.

Several European banks are affected: BNP Paribas of France said it had a potential 350m (£313m) exposure, Italy's Unicredt 75m (£67m), Spain's BBVA said it had exposure of 30m (£27m) and Switzerland's Union Bancaire Privée is thought to have invested 1bn francs (£560m).

Graham Campbell, fund manager at Edinburgh Partners, said: "The role of banks is to provide funding for clients and facilitate clients' business.

"One of the reasons banks have found themselves in this position is they have been using their trading book for a variety of other activities that are outside their core ones." He added that activities such as lending to hedge funds "will be tightened considerably going forward".

Campbell continued: "It doesn't surprise me but do I really think they should be doing this? No. I think there could be a few red faces around."

A growing number of financial groups also face substantial losses. Most of these are funds of hedge funds, with Man Group acknowledging its funds of funds had $360m (£235m) invested in two funds advised by Madoff Securities.

Bramdean Alternatives, headed by City figure Nicola Horlick, admitted that around 10% of holdings in two of its funds were invested with Madoff.

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