Lloyds Banking looks to escape toxic debt insurance

Friday 18th September 2009

Lloyds Banking Group has said they are in talks with the government to reduce the amount of toxic debt it puts into the asset protection scheme (APS).

The bank has said it wants to alter their use of the scheme to insure their riskiest assets against further losses.

Lloyds planned to put £260 billion of loans and investments into the APS, in return for taxpayers getting a larger stake. They said they were also looking towards a cheaper rate for the state guarantees of losses from bad loans, encouraged by "improving economic conditions".

Under the scheme the bank would take the initial hit on losses from the toxic assets, but the taxpayer would cover remaining losses.

However, Lloyds Banking has been looking at ways of cutting the cost of using the insurance policy or turning to investors to raise funds to cover potential losses.

In a statement this morning, the group said: "In light of improving economic conditions and the results of Lloyds's detailed reviews of its loan portfolios and their expected performance, Lloyds and HM Treasury are discussing possible changes to the commercial terms on which Lloyds might enter into [the asset protection scheme] from those announced in March 2009, including the possibility of reducing the amount of assets covered by the scheme."

Lloyds, which is 43 per cent owned by the taxpayer, turned for state help after a rushed merger with HBOS following the Lehman Brothers collapse just over a year ago.

Because of this, Lloyds cannot act without the agreement of the Financial Services Authority (FSA) and UK Financial Investments, the Treasury body that manages the UK state's stakes in the banks.

A Treasury spokesman said negotiations with Lloyds Banking were ongoing with the government priority of maintaining financial stability and value for money for the taxpayer.

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