Lloyds at odds with Treasury over pull-out


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.

A man walking into the Lloyds Banking Group headquarters

At odds: Lloyds could be asked to pay millions to break away from government protection

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 £260bn of risky loans and mortgages into the scheme.

The Government would be liable for the vast majority of losses if the loans went bad.

In return, Lloyds was to pay the Government £15.6bn 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 £15bn 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 £150m has been suggested as possible, but it is understood the Treasury is looking for as much as £1bn.

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 £15.6bn 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 £11bn to businesses and an extra £3bn 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.'

Lloyds at odds with Treasury over pull-out

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