David Prosser: The black horse dreams of freedom

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The Independent Online

Outlook Slowly but surely, Lloyds Banking Group is inching away from the Government Asset Protection Scheme. Its statement yesterday confirmed what has been an open secret for more than a month, that it is considering a huge rights issue as an alternative to GAPS. But the announcement also contained a couple of nuggets of new information. First, that the Financial Services Authority is prepared to sign off the fund-raising, and second, that negotiations with the European Commission are at a stage where Lloyds is confident enough about the outcome to say that any divestments it is told to make will not have a "material impact" on the group.

Both those facts make it more likely that Lloyds will avoid GAPS. FSA approval for a rights issue has never been a given but, more interesting, is the idea that not participating in the insurance scheme and getting an easier ride from the EC might be two sides of the same coin. The EC takes the view that a Government underwriting losses on hundreds of billions of pounds worth of toxic assets – even it does so at a price – is not skimping on the state aid. Opting not to take that aid, then, may be a crucial part of the deal that sees the bank escape the worst strictures of the EC's competition commissioner, Neelie Kroes.

Ms Kroes, by the way, is likely to take some stick if she allows Lloyds to only give up the assets currently being bandied around as candidates for divestment, particularly from some in her home country. The Netherlands, after all, is still reeling from the EC's order earlier this week that ING should be broken up. If Lloyds were to be treated in the same way it would face the catastrophe of having to almost completely reverse last year's HBOS merger.

Still, the EC has reason to be less aggressive with Lloyds. It always said it would consider each European bank on its own merits, with reference to three tests: viability, the way in which restructuring costs have been shared by taxpayers and shareholders, and competition.

On the first two, Lloyds scores well. It is viable, and, unlike ING, which has raised not a single euro from shareholders, Lloyds has asked its own investors for cash, raising £4bn back in May. Opting for a chunky rights issue strengthens that argument.

On competition, Lloyds is weaker, with a dominant position in current accounts and mortgages. Still, as The Independent revealed on Tuesday, the UK Government has its own plans to begin addressing that issue.

Avoiding GAPS carries costs for Lloyds – a break fee thought to be several hundred million pounds – but the bank has always baulked at the cost of participating. If rejecting the scheme clinches a deal with the EC, Lloyds will do anything to comply.