Lloyds reconsiders participation in Asset Protection Scheme

Lloyds Banking Group is in discussions with the Government with regard to its participation in the Asset Protection Scheme (which insures against losses arising from toxic assets).

The banking giant, which is 43% owned by the taxpayer, enrolled in the scheme in March and planned to put £260 billion of loans and investments into the scheme (APS) - in return for taxpayers getting a larger stake in the group.

However, the bank is now reconsidering its participation since it doesn’t want the taxpayer’s stake to rise any further.

But Lloyds cannot escape the scheme without the agreement of the Financial Services Authority (FSA) and UK Financial Investments (the body set up to manage the Treasury’s shareholding in recapitalised banks).

This week, the FSA performed a series of stress tests on the bank to examine its capital needs. However, the City watchdog concluded that the bank required more capital to cope with soaring bad debts.

As a result, the bank will be under pressure to stay in the scheme.

In related news, Reuters this week reported that a ruling by the EU Commission could see the forced break-up of Lloyds Banking Group resulting in the total or partial sale of the Halifax brand.

However, Lloyds is reluctant to relinquish the well-known Halifax brand, and is thought to prefer a compromise whereby a large number of branches could be sold off instead of the entire Halifax brand.

Earlier this month the bank dropped out of the 50 safest banks list of Global Finance Magazine, and in August the firm posted a £4bn loss for the first six months of 2009.

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