The Royal Bank of Scotland plans to raise £19.7 billion through offering shares to shore up its balance sheet.

The government will buy £5 billion of preference shares, while RBS will also offer £15 billion new ordinary shares to existing shareholders at 65.5p per share.

Under the government’s scheme, any shares not taken up by shareholders will be bought by the Treasury.

Given that no dividends can be paid until the preference shares are bought back, the take up is expected to be low, leaving the government as a major shareholder.

The group hopes to restore dividend payments in 2010.

The bank also warned shareholders third quarter results will be affected by a £206 million write down, while operating profit for the first nine months is eight per cent lower.

The capital-raising comes just months after the bank raised £12 billion through a rights issue in June. RBS blamed a “severe deterioration” in the financial markets weeks after the offer for its additional capital raising.

Chairman, Tom McKillop, said: “This has been an extremely disappointing and difficult time for shareholders, employees and customers but I want to assure you that all of the board’s energy is devoted to re-establishing the value and reputation of the group.”

Following the capital raising, RBS said its tier one capital – a measure of a bank’s strength – will be 11.6 per cent, taking it from the lowest capitalised bank to become one of the highest.

Barclays and HSBC, which have both declined government hand-outs, have tier one ratios of 11.3 per cent and 8.8 per cent respectively.