Britain needs patience in selling stakes in two of its biggest banks, the body managing the holdings has said.

The two banks - Royal Bank of Scotland and Lloyds Banking Group - face 'significant legacy losses' and would have to cope with the impact of the recession, UK Financial Investments said in its first annual report.

UKFI said it was not setting any fixed timetable for disposing of the shares, but 'it expects to undertake a number of capital markets transactions over a sustained period.'

UKFI - which employs just 11 people at present and is run from a small set of offices in the Treasury.

The body holds a 70% stake in RBS and 43.3% of Lloyds and is run by John Kingman, a former Treasury official who now works with former investment bankers, and has stressed the body's independence from the government.

UKFI was set up in December to manage the stakes after the UK's £37 billion bail-out. 'The amounts involved are very large, and a successful disposal of our holdings will require professionalism and patience,' the group also said.

Mr Kingman has tried to distance the group from politicians, saying it will operate like any other engaged shareholder to maximise the value of its holding, and that it plans to sell down its holdings over time in an orderly way.

EU proposals tighten risks rules

Regulators will have powers to sanction EU banks whose pay policies encourage too much risk-taking, under a draft law published by the European Commission.

The Commission proposals tighten EU rules on bank capital requirements to apply lessons from the worst financial crisis since the 1930s, and require banks to improve disclosure of the holdings in securitised products - the type of assets at the heart of the credit crunch.

The draft, which requires adoption by the European Parliament and EU governments to become law, also proposes to tighten capital requirements on risky assets held by banks on their trading books.

The European Banking Federation said the draft law contained no surprises and that banks were prepared for changes.