Lloyds at odds with Treasury over pull-out

By SIMON WATKINS FOR THE MAIL ON SUNDAY
Updated:

Lloyds Banking Group is on a collision course with the Treasury over its plans to avoid the Government's Asset Protection Scheme, with officials expecting the bank to pay hundreds of millions of pounds as a break fee.

Controversially, analysts also expect Lloyds to try to negotiate a cut in the amount of cash it promised to lend businesses as part of the Government's economic rescue plans.

The banking group, formed by Lloyds' takeover of HBOS earlier this year, provisionally signed up to the APS in February. Under the deal, Lloyds would place £260 billion of risky loans and mortgages into the scheme. The Government would be liable for the vast majority of losses if the loans went bad.

Lloyds Banking Group

Lloyds has promised to increase the amount it lends to business and mortgage customers

In return, Lloyds was to pay the Government £15.6 billion in shares as a form of insurance premium.

Lloyds is trying to engineer a partial or even complete withdrawal from the APS by raising as much as £15 billion through a rights issue.

But Treasury officials believe that Lloyds has benefited from the APS scheme already because of the market assumption that its bad loans would be insured and so should pay a fee even if it escapes the scheme.

A figure of £150 million has been suggested as possible, but it is understood the Treasury is looking for as much as £1 billion. Such a figure could erode any benefit to Lloyds from keeping out of the APS.

Market watchers sympathetic to Lloyds suggested the bank should have to pay far less. One said: 'The stock market has been assuming that Lloyds would have to pay £15.6 billion in shares and has included that in its valuation of the bank.

'That has been a drag on the value of the business and so Lloyds has already paid a price for its possible membership of the APS.'

When the APS was launched, Lloyds and Royal Bank of Scotland both agreed as a condition of joining that they would boost lending to homeowners and small businesses.

Lloyds agreed to lend an extra £11 billion to businesses and an extra £3 billion to mortgage customers.

However, the terms of the loan specify that if a bank decides not to join the APS its loans promises would be adjusted. It is thought Lloyds wants to reduce the scale of its promised loans to small business.

The Treasury is meanwhile looking into whether Lloyds and RBS have already been avoiding meeting their loan commitments to small businesses.

Both banks have claimed there is little demand for loans from smaller companies. One Whitehall source said, however: 'The Treasury is not convinced of that case yet.'

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