HBOS was last night drawing up plans for a rights issue raising up to £4 billion pounds of fresh capital after taking the view that it wants a big cushion of capital as Britain enters a housing downturn.

Directors at the banking group are thought to have warmed to the option of a significant capital-raising over the past few days and are likely to announce it before the annual meeting in Glasgow tomorrow.

Although the bank’s capital position is stronger than that of Royal Bank of Scotland, which last week announced plans to raise £12 billion and is understood to be on the verge of cutting as many as 7,000 jobs, HBOS believes that it is prudent to bolster its balance sheet in what is likely to be a stormy year for the housing market. HBOS has been gloomier about the economic outlook than its peers for some time.

HBOS’s core Tier 1 capital ratio - a key measure of capital scrutinised by regulators and investors - is 5.7 per cent, well ahead of RBS’s at 4 per cent and Barclays at 5.1 per cent.

HBOS is also expected to reveal writedowns of about £3 billion partly because of the falling value of its £7 billion portfolio of Alt-A mortgages - a category of American home loans between sub-prime and prime.

If it goes ahead a rights issue is likely to be at least partly underwritten by HBOS’s joint brokers Morgan Stanley and Dresdner Kleinwort.

A rights issue would pose challenges for HBOS because of its army of two million small shareholders, the result of the demutualisation of its predecessor body Halifax Building Society ten years ago. Of its shareholders, 800,000 hold 200 shares or fewer, suggesting that they would be asked for only a few tens or hundreds of pounds in a rights issue. Another 1.15 million own fewer than 1,000 shares.

Mervyn King will come under pressure from MPs this week to explain why the Bank of England was slower to react to the fallout from the credit crunch than other central banks.

Mr King, who will appear before the Treasury Committee tomorrow to be questioned on his reappointment as Governor of the Bank of England, will be asked about the Bank’s £50 billion bailout scheme, which starts today. The US Federal Reserve Bank initiated a similar plan more than six weeks ago.

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