Shares in Barclays rose 17.4 per cent this afternoon after the bank confirmed that the Financial Services Authority, the City watchdog, had given the bank's balance sheet a clean bill of health, which will allow it avoid seeking funds from the Government.

The FSA has been stress-testing Barclays' balance sheet over the past week to ensure there are no major holes in its finances.

The bank said today: "The purpose of the stress test has been to determine resilience to stressed credit risk, market risk and economic conditions..

Barclays added that "following this work and discussion with the FSA, its capital position and resources, after exposure to the stress, are expected to continue to meet the capital requirements which the FSA published on 19 January 2009." Shares in Barclays added 24.5p to 164.5p.

The all-clear means it will not have to return to investors for more capital immediately. It will also strengthen its hand in negotiations with the Treasury over costs for making use of the Government's asset protection scheme to insure its toxic debt.

However, many analysts think that after the investments of two Middle Eastern backers convert to equity in June, the bank may consider making a cash call to shareholders to give it further capital to see it through the next two or three years, when loans are expected to turn sour.

Barclays was also helped by talk that it is close to selling its iShares business for up to £3.5 billion.

The Government has set a deadline of March 31, next Tuesday, for banks to apply for the asset protection scheme.

Meanwhile, shares in Lloyds Banking Group and Royal Bank of Scotland were also soaring, up 11 per cent and 3 per cent respectively, as analysts gave the thumbs-up to their plans to buy back £8 billion to £9 billion of bonds — known as "tier two" or "hybrid debt" — at roughly half their face value.

Lloyds is paying 58 per cent of face value and RBS 49 per cent for the debt. These prices are well above the bonds' market prices before they offered to buy them back. RBS hybrid debt was trading at just 26 per cent of face value and Lloyds at 32 per cent.

Barclays is thought to be considering making a similar move.

Bruno Paulson, a Bernstein analyst, said: "These buy-back offers are an indication that hybrid capital is increasingly pointless, and further evidence of the financial strength of the banks that have asset protection from the Government."

He added that they would bolster the banks' regulatory capital and reduce their interest payments.

"The deals could ease excessive fears about UK insurer exposures to hybrid bank debt, and in particular UK banks. Insurers are exposed to losses rather than price moves, and the buy-back should strengthen our case that losses are unlikely," he said.

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