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Royal Bank of Scotland has announced a £12 billion rights issue to improve its capital base.

The issue is being made on the basis of 11 new shares for every 18 existing shares at an issue price of 200p per RBS share, a 46.3 per cent discount to the closing price of RBS shares on April 21st 2008, the last trading day before the announcement.

Britain's second-largest bank said the rights issue will increase its tier 1 capital ratio to over eight per cent by the end of the year, in line with a new target to maintain a ratio between 7.5 per cent and 8.5 per cent.

RBS also reported additional write-downs related to the credit crunch of £5.9 billion before tax.

Chairman Sir Tom McKillop said: "This is a difficult time for the financial services industry, and it has presented us with specific challenges. Central to these has been the question of our capital ratios, which have been the focus of much attention, both internal and external, over recent months.

"It was the board's declared intention to rebuild our tier 1 capital to the middle to upper end of our historic range of seven per cent to eight per cent over a three-year period, but in light of the current market environment, this level and timing are considered no longer appropriate."

The bank said it had revised its plan to increase its capital in the light of the severe and increasing deterioration in credit market conditions, the worsening economic outlook and the increased likelihood that credit markets could remain difficult for some time.

RBS also said it is considering selling off RBS Insurance and other smaller assets to boost its core tier 1 capital by a further £4 billion by the end of 2008.

The Edinburgh-based bank is believed to have depleted reserves due to subprime-related losses and last year's takeover of Dutch group ABN Amro for €71 billion (£57 billion).

Yesterday, Bank of England governor Mervyn King welcomed the anticipated move by RBS and urged more banks to consider making a rights issue to raise capital.