The banks currently engaged in the legal action with the office of fair trading (oft) over alleged unfair charges are defending their actions as preferable to the alternative.

Laurence Rabinowitz QC, defending the Royal Bank of Scotland, said the only alternative to overdrawn charges would be to charge on all transactions, a result no one would like.

Mr. Rabinowitz prediction echoes warnings by Angela Knight, chief executive of the British Bankers' Association, that an OFT victory would have "consequences".

Experts predict it could lead to the end of free banking for the millions of current account customers who stay in credit and who, therefore, do not currently incur charges. It is unsure what effect this would have on banks unsecured and secured loans.

The OFT argue that bank overdraft charges fall foul of the 1999 regulations that govern unfair terms in consumer contracts and, if their legal action is successful, that they should be able to set the limit on the charges.