More British banks are poised to tap shareholders for billions of pounds in emergency capital, Mervyn King, the Governor of the Bank of England, revealed yesterday.

As Royal Bank of Scotland put the finishing touches to a £12 billion rights issue, expected to be announced today, Mr King hinted strongly that RBS would be the first of many.

“I’m pleased that banks have recognised the need to raise capital. I expect we will see more of it in the coming weeks,” he said as he announced details of the Bank’s plan to loosen the paralysed money markets with a £50 billion injection of fresh liquidity.

Bank shares dived as investors speculated on likely contenders to follow RBS’s lead, with Barclays and HBOS seen as favourites among the biggest banks. Alliance & Leicester and Bradford & Bingley are also under pressure.

Unless sovereign wealth funds buy new bank shares at a premium, existing bank shareholders are likely to be asked for tens of billions of pounds in fresh equity, analysts said. JPMorgan estimated that Britain’s four largest banks had a £37 billion shortfall in capital — £13 billion for RBS, £11 billion for HBOS, £8 billion for Barclays and £4 billion for Lloyds TSB. “Lack of capital in the UK banks is a systemic issue, not only a RBS-specific one,” it said.

Merrill Lynch analysts said that RBS’s rivals were likely to feel pressure to reveal losses and raise capital once the Edinburgh-based bank had successfully tapped shareholders.While US banks have been strengthening their balance sheets with share issues since December, their UK counterparts have been reluctant to do the same — to the growing concern of officials in Threadneedle Street.

RBS is expected today to announce plans for a rights issue of about £12 billion and to unveil about £6 billion before tax in fresh losses because of US sub-prime lending, other structured credit and leveraged loans. It is also set to announce the possible £5 billion auction of its Direct Line general insurance arm. The RBS board was meeting last night to approve the plans.

Mr King hailed his new bonds-for-mortgages scheme as the best way of improving liquidity in the banking system and restoring confidence. Banks are able to exchange illiquid securities such as securitised mortgages and credit card debt with the Bank for highly liquid government securities for up to three years.

“This is not a bailout for banks,” Mr King said. “The objective is not to protect the banks. It is to protect the public from the banks.”

Banks largely welcomed the special liquidity scheme, with Barclays pledging to participate in it and other banks saying that it would be widely used. However, some commentators were sceptical, arguing that the terms set by the Bank were too harsh.

There was little evidence of any immediate relief for the paralysed interbank lending market. Three-month sterling Libor, the closely watched rate at which banks lend to one another, eased only fractionally — from 5.893 to 5.885. It is still almost a percentage point above base rate of 5 per cent, historically a huge margin.

Any hopes that it would instantly boost the mortgage market were dashed when Abbey raised many of its lending rates by up to 0.61 per cent and abandoned buy-to-let mortgages.

Mr King emphasised that the scheme would not be used to prop up a failing bank, nor to underpin the sliding housing market. He also said that it would not increase the Government’s net debt and should, therefore, not raise the cost of borrowing for the Government. He said that the worst that could happen was that the scheme “will be seen to have been unnecessary”.

The International Monetary Fund sounded a fresh warning, saying the strains in the financial system in Europe were sapping economic strength. The appreciation of the euro and rising inflation were adding to the Continent’s troubles and growth would slow sharply in 2008, it said.

The Bank of England yesterday postponed publication of its twice-yearly Financial Stability Review, a closely watched barometer of the solidity of the financial system, saying that it wanted to incorporate details of the liquidity scheme. Due out tomorrow, it will now be published on Wednesday week.

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