The Government and its financial regulator sought yesterday to calm fears about the health of Lloyds Banking Group before the start of trading in the embattled bank's shares today.
The Treasury tried to dampen talk of Lloyds being nationalised after Friday's unveiling of an £11bn loss at Halifax Bank of Scotland (HBOS), the stricken bank it bought last month in a Government-brokered deal.
Sources pointed to the Chancellor's comments at the weekend's G7 meeting that banks were "best run on a commercial basis in the private sector, properly supervised and regulated" and that "nothing has changed" in relation to ownership.
Lloyds shares lost 42 per cent last week as concern mounted about losses at HBOS, ending in a drop of almost a third on Friday to 61.4p after the bank issued its shocking trading statement.
The Financial Services Authority tried to shore up confidence in Lloyds by saying it had expected losses like those revealed on Friday when it forced banks to raise capital. Lloyds and HBOS accepted Government funds, leading to a £17bn injection and the state owning 43 per cent of the bank.
"The losses ... are not huge surprises to the FSA," Lord Turner, chairman of the watchdog, told The Andrew Marr Show. "What we did last October was run stress tests which were considerably worse than what was in the public domain to work out how big the capital subscription had to be."
The authorities want to stop panic in the equities market spreading to investors who fund Lloyds' lending – creating the "death spiral" that nearly caused HBOS and Royal Bank of Scotland to implode in October. Lloyds said yesterday there were no issues over its ability to fund. Friday's trading statement was thin on detail about how and when the losses occurred, leaving investors jittery about this year's outlook until full results are published on 27 February. The main problems are not Halifax's mortgage business but Bank of Scotland's corporate banking division, which lent aggressively to the commercial property, house building and retail sectors.
"If the outlook [for HBOS's corporate bank] is little short of catastrophic then you are looking down the barrel of nationalisation," Alex Potter, banking analyst at Collins Stewart, said.
He added that Lloyds provided some comfort by saying its core capital buffer was well over the minimum at the end of last year. But with its share price so low, if it needed £3-4bn of Government capital that would take it close to full nationalisation, he added.
Vince Cable, the Liberal Democrat Treasury spokesman, said: "What's worrying about it is that we're getting into nationalisation accidentally."