Analysis: If Royal Bank of Scotland (RBS) does emerge next week as the first major UK banking group to seek eye-popping amounts of new money from shareholders to rebuild its balance sheet, what will that tell us about Scotland�s largest company?

IF Royal Bank of Scotland (RBS) does emerge next week as the first major UK banking group to seek eye-popping amounts of new money from shareholders to rebuild its balance sheet, what will that tell us about Scotland's largest company?

Royal is said to be looking for around £10bn, more than one-quarter of its current market value. In this context, numbers with that many zeros usually signal panic.

Has RBS been far too acquisition-hungry for much too long, most recently paying an inflated price to lead the consortium break-up of Dutch rival, ABN-Amro, just as the global credit crunch was turning inter-bank liquidity to treacle?

Has RBS's hard-driving chief executive, Sir Fred Goodwin, who has long insisted RBS had no need to raise new capital, finally lost credibility? Should Goodwin, as some City analysts are already suggesting, be sacrificed by his board, if this rights issue is to fly?

Or is this a vital step in restoring order to the global banking system? Might RBS be showing leadership and acting responsibly, whatever the short-term embarrassment? Is this a price more banks will have to pay, before the crisis subsides and something approaching normal service resumes?

The initial market reaction to RBS's as-yet unconfirmed plans steers us towards the second of these scenarios. Its shares rose 18p yesterday, up 4.9% on the day. That's not how markets normally greet a massive rights issue.

While analysts may still be calling for Sir Fred's head - a long-running feud, that one - might the wider investment community see major capital-raising exercises by banks as all but inevitable, if the current mess is to be sorted out? They certainly should.

After last week's breakfast with Gordon Brown in Downing Street, which Sir Fred attended, the talk was all about what politicians and central bankers should be doing to help get commercial banks lending to each other again - lending which helps fund mortgages but has stalled in the current climate.

Word began to seep out about a Bank of England plan to allow banks with secure but currently untradeable mortgage-backed securities to swap them for new-issue government gilts, in a bid to kick-start the whole market again. But there was quid pro quo which got little attention.

For months, Bank of England Governor Mervyn King has been warning banks any bail-out requires remedial action by them, too.

Confusion and suspicion about which banks are most exposed to the fall-out from what started as a sub-prime mortgage crisis in the US lies at the heart of this present lending deep-freeze. King is clear that, until banks own up to who has lost what and shareholders shoulder some of the pain of putting balance sheets back together, it is unreasonable to expect the state to launch as many lifeboats as it takes to save them all from their past excesses.

Having hiked their dividends on the back of last year's profits in an act of collective machismo, having blustered about the need for King and his colleagues to throw public money at the problem as King's opposite number, Ben Bernanke at the Federal Reserve, had done in the US, the big UK banks appear to have emerged from their denial phase.

This is their problem too, and they and their shareholders must pay a price for putting things right. RBS certainly has questions to answer about how stretched its core capital is, especially after paying around £10bn net for its share of the ABN-Amro spoils - 73% in cash. Sir Fred has to show his growth-by-acquisition strategy still stacks up in the post-crunch environment.

But if RBS has also seen the inevitability of the trade-off it now appears to be embracing, it is doing itself and the entire banking system a very big favour. By placing itself at the head of the queue to write off whatever losses lurk in its books and rebuild its balance sheet, it will have taken the lead in rebuilding the trust shattered by this crisis, without which no banking system can hope to prosper.