HBOS has announced a £4 billion rights issue to strengthen the group’s capital base.

Britain’s biggest mortgage lender also raised its target tier 1 ratio – the measure of a bank’s financial strength – to between eight per cent and nine per cent, with a core tier one ratio of between six and seven per cent.

The rights issue will be on the basis of two new ordinary shares for every five existing ordinary shares at 275p per share, a 45 per cent discount to the trading price on April 28th.

HBOS, which owns Halifax and Bank of Scotland, is the second bank to ask its shareholders for cash to bolster its reserves during the credit crunch.

Royal Bank of Scotland last week issued a £12 billion rights issue as its own core ratio was one of the lowest in Europe.

Although HBOS’s tier 1 capital was 5.7 per cent at the end of 2007, better than Royal Bank of Scotland’s which was placed at slightly over four per cent, the lender is vulnerable to the downturn in the housing market.

Andy Hornby, group chief executive, said: “We are planning for a more challenging environment ahead and the proceeds of the rights issue should ensure that we benefit from strong ratios even if the macroeconomic environment deteriorates further.

“We are focused on achieving returns on equity in the mid teens and are well placed to deliver long term sustainable growth.”

More banks may follow with rights issues of their own. Barclays was rumoured to be next, but at the bank’s AGM chief executive John Varley dismissed the idea.