Barclays will this week say how it plans to meet tougher UK rules on capital, while strong earnings from Lloyds Banking Group will pave the way for Britain to sell some of its shares in the bank.

Barclays, which publishes results on Tuesday, is expected to set out plans either to sell bonds that are wiped out if it hits trouble or to raise equity to meet the UK rules.

Barclays' advisers have sounded out investors about a possible 4 billion pound ($6.15 billion) rights issue, the Sunday Times reported.

Sources familiar with the matter said last week that was an option, but not the preferred one. Chief executive Antony Jenkins is still in talks with regulators about how to hit the target, so plans could change at short notice.

Barclays declined to comment.

The bank needs about seven billion pounds ($10.8 billion) to lift its leverage ratio to a three percent minimum demanded by the Bank of England from an estimated 2.5 per cent, which includes future losses from mis-selling and bad loans.

Regulators are focused on banks' leverage ratios - that measure a bank's assets against its equity - to keep risk-taking in check to avoid future taxpayer-funded bailouts.

Barclays has already said it plans to issue more capital that could convert into shares or be wiped out if its capital ratios fall below a certain level.

The bank has to make sure any bonds it sells would help its leverage ratio under the UK rules. To do this, the bonds would have to count towards Tier 1 capital, the key measure of a bank's financial strength. Similar bonds Barclays has sold, known as CoCos, have been classed as Tier 2 capital.

Much will depend on how much time the bank is given. The regulator is expected to give the bank until the end of 2014, but a tighter deadline could force the bank to raise equity.

LLOYDS SALE

Lloyds is forecast to report a doubling of its first-half profit, when it reports on Thursday, illustrating the turnaround at the bank since its 20.5 billion pound ($31.5 billion) bailout by the government in the 2008 financial crisis.

Banking industry sources had said the results could provide a window of opportunity for UK Financial Investments, which manages the government's 39 per cent stake in Lloyds, to initiate an immediate first sale of up to a quarter of the shares, valued at around 5 billion pounds.

But sources with knowledge of government thinking said a first sale, comprising a placing to institutions such as pension funds and insurers, was more likely to take place in September or October with a sale this week seen as a "long shot."

The August holiday season is traditionally a quiet period for share placings and if a sale does not happen immediately after or alongside the results, the government would most likely have to wait until September at the earliest.

Lloyds, the Treasury and UKFI declined to comment.

MIS-SELLING

Barclays and other UK banks are also expected to set aside hundreds of millions of pounds more for mis-selling of financial products, including payment protection insurance, an industry source familiar with the matter said.

UK banks have already set aside more than 14 billion pounds for PPI compensation, but they did not add to that in the first quarter, suggesting payouts had peaked.

Barclays has set aside 2.6 billion pounds for PPI costs and 850 million for interest rate hedging compensation, and both of those could rise.

Lloyds has set aside 6.8 billion pounds for PPI, far more than rivals, and could this week set aside another 250 million pounds, Investec analyst Ian Gordon estimated.

Barclays could set aside 600-800 million pounds more for PPI, the Sunday Telegraph reported.

Barclays is expected to make a profit of about 3.7 billion pounds for the first six months of the year, up from 759 million a year ago, according to the average of 22 analysts polled by the bank.

Lloyds will report an underlying pretax profit of about 2.2 billion pounds, up from 1.1 billion the year before, according to a Reuters poll of six analysts. It is expected to report progress in reducing costs and an improved capital position. - Reuters