Lloyds seeks its own terms for asset scheme

UK's biggest retail bank set to announce scope of insured assets today

Lloyds Banking Group was locked in talks with the Treasury and its advisers last night over the size and terms of its participation in the Government's asset protection scheme.

After weeks of speculation, the Government's priorities became clearer yesterday as Royal Bank of Scotland announced that it would put £325bn of assets into the scheme to insure against further losses.

The Treasury's outline terms require participating banks to retain a "first loss" risk. For RBS, this was £19.5bn or 6 per cent of the assets insured. The state then insures 90 per cent of the remainder.

Lloyds shares jumped by 31 per cent to 75p as investors breathed a sigh of relief that the Government's terms for taking part in the plan were not too punishing.

Lloyds said yesterday that it was in talks with the Government about the scheme and was aiming to give details this morning. "These discussions are ongoing and no terms have been agreed. There can be no certainty that Lloyds' participation would be on the same terms as those announced by RBS," the bank said.

As with RBS, the key discussion points for Lloyds are the size and character of the assets to be insured, the price and the method of payment.

Lloyds was expected to put up to £250bn of loans and investments into the scheme, but RBS's announcement showed how terms could change late in the discussions. The final figure was £325bn because the Government wanted to insure extra assets to ensure the bank could lend into Britain's ailing economy.

Eric Daniels, Lloyds Banking Group's chief executive, has continued to insist Lloyds should not be lumped in with RBS. The bank managed to extract better terms from the Government in October's first bailout of the sector.

Lloyds is 43 per cent owned by the Government and wants to avoid handing over a majority stake in its ordinary shares to the state. RBS paid in non-voting shares, but the Government's claim over the bank's assets could rise from 70 per cent to 95 per cent under the deal.

The bank may have little choice other than to take part because the losses suffered by HBOS, which Lloyds bought last month, have raised fears of full nationalisation if the Government does not cover its future losses.

Lloyds, which had been seen as one of the strongest survivors of the credit crisis, panicked investors two weeks ago with a rushed trading statement that revealed £11bn of losses at HBOS. Lloyds agreed to rescue HBOS with the Government's blessing to gain massive a market share in UK retail banking.

The other main candidate to participate in the scheme is Barclays, which has fiercely resisted taking Government money to avoid being told where to lend. RBS had to pledge £25bn extra in mortgages and business loans as part of the deal.

Barclays has consistently said it would take part if the price was right. It had indicated that it was prepared to pay cash to avoid Government influence. Banking analysts increasingly think Barclays will choose to go it alone rather than take Government money.