The alleged fraud took the form of a "Ponzi scheme", US prosecutors have said.
Banks in the UK have said that they have exposure to the hedge fund run by Bernard Madoff, who is currently on bail for fraud.
Mr Madoff, a former chairman of the Nasdaq stock exchange, was arrested last week by prosecutors, who say that he ran up £33 billion of fraudulent debts. He is alleged to have admitted that the fund was a "Ponzi scheme", in which money from later investors was used to pay earlier investors in order to cover up losses.
RBS said today that it had around £400 million of exposure to the fund, while Santander said that it was directly exposed by around £15 million. However, the Spanish financial services giant also has another of its own funds currently under the control of Mr Madoff's investment firm.
Meanwhile, a report in the Financial Times today suggests that HSBC is potentially exposed to the fund by around £668 million. This has not been confirmed by the bank.
Speaking to the BBC, City "superwoman" turned fund manager Nicola Horlick had strong criticism for US financial watchdogs. "I think now it is very difficult for people to invest in things that are meant to be regulated in America, because they have fallen down in the job," she commented.
