Crosby received the honour in 2006 under the Labour government, shortly after he left the bank to become deputy chairman of City regulator the FSA. But two years later HBOS collapsed and needed a £20.5bn taxpayer bailout. He resigned from the FSA in 2009.
The 56-year-old also pledged to give up 30 per cent of his pension, which pays him £580,000 a year.
Last night he also quit his job as a non-executive director at Compass Group after six years.
He had been a member of the remuneration, audit, corporate responsibility and nominations committees at the group.
Crosby also left his unpaid role as a trustee at Cancer Research UK.
He quit as an adviser to investment firm Bridgepoint on Friday.
“I am deeply sorry for what happened at HBOS and the ensuing consequences for former colleagues, shareholders, taxpayers and society in general,” he said in a statement.
“Shortly after I left HBOS, I received the enormous honour of a knighthood in recognition of my own – and many other people’s – contribution to the creation of a company which was then widely regarded as a great success.”
“In view of what has happened subsequently to HBOS, I believe that it is right that I should now ask the appropriate authorities to take the necessary steps for its removal.”
Although the knighthood has not been formally revoked as it was in the case of ex-RBS boss Fred Goodwin, he can voluntarily hand it back and stop using the title.
The forfeiture committee may now meet in the near future to decide whether or not to officially remove the honour. They would then pass their recommendation to the Queen who has the final say.
In such an event the forfeiture would be formally revoked and announced in the London Gazette.
But so far, the move is simply a voluntary one, with Crosby choosing not to use the title currently.
Labour MP John Mann welcomed the decision to give up the honour.
“This sets the benchmark for others and it is highly appropriate. At last we have a banker who is prepared to say he got it wrong and wishes to make amends,” said the member of the influential Treasury Select Committee. “I hope now that this is not an isolated stance and others will follow his example and give up some of the grandeurs of power and pension benefits that they have gained on the back of poor leadership.”
But Crosby’s now former colleagues at Compass paid tribute to his work at the group.
“On behalf of the Board, I would like to thank James for the significant contribution he has made to the company over the last six years,” said chairman Sir Roy Gardner.
Cancer Research UK’s chairman also thanked Crosby.
“I fully respect James’s decision to step down as a trustee and, on behalf of the charity, would like to thank him for his active support over the past five years and wish him well,” said Michael Pragnell.
Last week the Parliamentary Commission on Banking Standards said the way the bank was run before the crisis was “a manual for bad banking.”
The MPs and peers on the Commission also called for more personal responsibility, complaining that “those responsible for bank failure should be held more directly accountable for their actions and sanctioned accordingly.”
Other bosses were also criticised, including Andy Hornby, Crosby’s successor. He now heads up bookmakers Coral. Although the firm says it has no plans for Hornby’s departure, business secretary Vince Cable is looking at banning Hornby, Crosby and former HBOS chairman Lord Stevenson from holding directorships in Britain.