Royal Bank of Scotland (RBS) is by far the most damaged of the UK banks from the latest selling frenzy, its shares down by a teeth-gritting 39 per cent at their worst this morning. That may be partly down to speculation that the bank has taken a bath in the esoteric world of credit default swaps. It may be because of concern that RBS could still have some residual exposure to those bits of ABN Amro earmarked for Fortis, as its erstwhile partner in that ill-fated deal consortium implodes.

But the main reason is the fear that ordinary shareholders will be seriously diluted by the Government's putative plan to pump in capital in return for preference shares. RBS looks the keenest to clinch a deal, taking as much as £15 billion from taxpayers to beef up its balance sheet. That is rather more than the £12 billion raised from ordinary shareholders earlier this year.

There are precious few details about the mechanics of the bailout plan. But if government officials are using the Buffett-Goldman Sachs deal of last week as a template, then shareholders can expect to be at least partly wiped out. One theory is that either the preference shares will be convertible into ordinary shares at a favourable price, or they will come with warrants — basically options giving the Government the option to buy newly issued ordinary shares at a favourable price. There will be — and should be — huge pressure on ministers to ensure that taxpayers, if they have to shoulder this unwanted risk, at least share in the upside if RBS can be restored to health.

Either way, at the very best, ordinary RBS shareholders could be left waiting many years before they see a dividend again. And they could end up owning a relatively small chunk of the rescued bank.

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