British bank shares slumped yesterday after Barclays confirmed it was looking at capital raising and fears rose about credit insurance pay-outs as investors absorbed massive losses on Lehman Brothers' debt.

British bank shares slumped yesterday after Barclays confirmed it was looking at capital raising and fears rose about credit insurance pay-outs as investors absorbed massive losses on Lehman Brothers' debt.

Shares in Royal Bank of Scotland, tipped yesterday by analysts to raise an extra £10bn of capital in coming weeks, fell 24.3p, or 25.3%, to 71.7p, its lowest close since May 1993. Concerns also mounted that it faces losses from insuring companies' debt.

Barclays, which appears to be sounding out existing investors about a capital injection, dropped 34.25p to 207.5p, a 14.2% fall.

HBOS fell 29.25p, 19.1%, to 124.25p, a 21% discount to the implied value of a take-over offer from Lloyds TSB.

This strengthened expectations that Lloyds, which fell 22.375p to 189.375p, might try to renegotiate.

HSBC, which on Thursday injected £750m of equity into its UK bank, dropped 70p, or 8.1%, to 790p.

Barclays said yesterday it is "considering a number of options, including capital raising" as part of banks' agreement with the government this week.

This indicates a preference for tapping existing investors including Qatar's sovereign wealth fund, China Development Bank, Singapore's Temasek and Japanese bank Sumitomo Mitsui before accepting state help.

Banks have agreed to boost their capital by £25bn by the end of 2008, which the government said it would provide, if necessary, with some conditions.

There were also reports the German government is devising a similar capital injection plan for its banks and could provide guarantees worth 100bn (£79bn).

Jonathan Pierce at Credit Suisse said yesterday he expects Royal Bank to seek £10bn, HBOS and Barclays £5bn each and Lloyds TSB £4bn.

"The government will likely provide some of this funding, but we believe there's a good chance existing shareholders get involved with Government supporting such issues. The alternative is seeing their bank 20%-40% nationalised."

But Shaun Miskell, ana- lyst at fund manager Blue Planet, cautioned: "The main problem is confidence. Given what's happened in the banking sector in the last six months whether existing shareholders would want to put the money up is in doubt."

Analysts warned banks could still be swamped by losses on insurance on company debts, known as credit default swaps (CDSs).

Yesterday holders of CDSs backed by Lehman Brothers debt were told they face losses of 90.25%.

A similar process is due for the three Icelandic banks that went into receivership this week, while the bankruptcy of another large bank or corporation such as Ford or General Motors could also hit them.

Sandy Chen of Panmure Gordon said that RBS and Barclays are the most exposed with around £2.4 trillion each in credit derivatives exposure, half of which they wrote for others and half they purchased to cover debt they bought.

"Against this, tangible shareholders' equity bases of £20-£30bn seem like cloth tents in a hurricane," Chen said.