Why is RBS being forced to raise money through a rights issue?

Banks have to keep a certain amount of capital on their balance sheets to provide protection against unexpected losses. The most common measure is known as the Tier 1 Capital Ratio and it is the number that regulators' look for to determine a bank's financial strength. In RBS's case, its Tier 1 ratio is 6.7 per cent, which is the lowest of any British bank. Its core Tier 1 ratio, which excludes capital such as preference shares, is even lower, at 4 per cent. RBS's capital levels are partly so low because of its massive acquisition of ABN Amro, the Dutch bank, last year, which ate up a lot of its cash.

Does RBS still have billions of pounds of writedowns to come?

Yes, it probably does, although that is not the only reason RBS is selling the shares. British banks are under a lot of pressure from the Government and the Bank of England to raise their capital levels and at the same time come clean about the extent of their writedowns. It is in their interests to do so, especially because they are pleading with the Bank to lend them additional billions of pounds and extend the range of collateral they are prepared to accept in return for the loans.

How will the sale be structured?

It is thought that RBS will seek to raise up to £13billion. The shares will be sold at a discount, which is typically between 30percent and 50percent of the current share price. Because RBS is looking to raise more than 5per cent of its market value, it must gain shareholder approval. It will seek that at the annual meeting on Wednesday.

Does the sale please shareholders?

They will remember that Sir Fred Goodwin, the chief executive, swore in February that the bank would not need to raise more capital, despite speculation at the time. Some are miffed that he appears to be doing a U-turn, so Sir Fred will need to explain himself next week. RBS investors have been broadly supportive of Sir Fred in the past, however, even backing the €70billion (£55billion) acquisition of ABN Amro just as the credit crunch hit.

How much do the advisory banks stand to make from the rights issue?

Merrill Lynch and Goldman Sachs have agreed to underwrite the share sale. Typically, banks get between 2percent and 3percent of the total size of the offer in fees, so they stand to pocket about £260million. If they cannot sell the shares in the market, however, the banks will be forced to hold them, although sources seem to be reasonably confident that they will be able to get the sale away.

How does this rights issue compare with others?

If it goes ahead, it will be Britain's biggest cash call on existing investors, dwarfing BT's £5.9billion rights issue in 2001. Sources say that one of the reasons RBS is planning to raise so much is because it wants to get it over with in one go. The theory is that shareholders will accept the need to raise cash once, given the deterioration in the markets, but that they will not countenance the begging bowl twice.

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