HBOS has more private shareholders than any other UK company
HBOS has announced plans for a rights issue to raise £4bn of extra funding from its existing shareholders.
The bank, which has more than 2 million shareholders, said it was planning for "a more challenging environment ahead".
HBOS added it was writing off £2.8bn from the value of its investments linked to the US sub-prime mortgage market and the global credit crunch.
Last week, Royal Bank of Scotland announced it was planning to raise £12bn through a rights issue.
Banks have been suffering as a result of the impact of the global credit crunch which has affected the value of their investments and threaten the profitability of their businesses.
"Trading conditions in the first quarter of the year have been challenging against the backdrop of global financial market dislocation that is now impacting on the wider economy," HBOS said in a statement.
HBOS said the extra funding would allow it to grow internationally and invest in its residential mortgage and savings business.
"The capital raised today will provide us with financial resilience in challenging economic circumstances," the bank said.
HBOS is the most widely-held UK share, as a result of the Halifax building society's demutualisation in 1997. HBOS was formed by the merger of the Halifax and Bank of Scotland in 2001.
WHAT IS A RIGHTS ISSUE?
Companies issue extra shares to raise money
They are offered to existing shareholders, usually at a discount to the current share price
Shares are offered in proportion to existing holdings, so if you own 10% of the old shares you are offered 10% of the new ones
Existing shareholders will be offered two ordinary shares for every five existing shares they hold for 275 pence per share.
HBOS said it was offering the shares at a price that was 45% less than the closing price of its shares on Monday of 495.75p.
The bank's shares initially rose 2.3% to 507 pence on Tuesday after the rights issue was announced, before falling back to close down 1.8% at 486.75.
Shareholders have until 7 August to decide whether to take up the offer.
Speaking of the outlook for the UK economy, HBOS said it expected GDP growth of between 1.25% and 1.5% in 2008.
It is forecasting good employment prospects and low interest rates, plus a "mid single digits" percentage fall in UK house prices this year and next.
"HBOS is not forecasting a meltdown in the economy," remarked the BBC's business editor Robert Peston.
"But, because of the instability of global financial markets, there is a meaningful risk that the out-turn could be a lot worse.
"Which is why HBOS has decided to reinforce its hull against the risk of hitting an iceberg," he said.