European banks including HSBC and the part taxpayer-owned Royal Bank of Scotland have lost money following an alleged $50 billion (£33.4 billion) investment fraud.

Wall Street trader Bernard Madoff shocked the financial world last week when he admitted to senior employees at his hedge fund – thought to be his two sons – that the entire scheme was a fraud and losses ran to $50 billion.

Mr Madoff allegedly confessed the fund had “nothing” and was in fact a giant Ponzi scheme, in which returns are paid for with money from other investors rather than through profits.

The Financial Times has reported HSBC could be one of the biggest victims, with losses of $1 billion (£667 million). The bank has not commented on the story.

In addition, Royal Bank of Scotland, which is now 58 per cent owned by the taxpayer, has reported an exposure of up to £400 million.

Meanwhile, Banco Santander, which owns UK banks Abbey, Alliance & Leicester and Bradford & Bingley, said it has lost around €2.3 billion (£2.06 billion) from the alleged scam.

BNP Paribas, France’s largest bank, said it could face a potential loss of €350 million (£314.8 million) from investments.

Hedge fund Man Group also revealed $360 million (£240.3 million) invested with Madoff Securities.

The fraud comes at a time when banks and hedge funds are struggling to cope with losses from the financial climate and has sparked an outcry as to how regulatory authorities failed to act earlier.