Lloyds meets Treasury over toxic scheme

Lloyds Banking Group today said talks were ongoing over possible alternatives to the Government's toxic asset insurance scheme amid speculation it has been banned from withdrawing.

The group, which is 43 per cent owned by the taxpayer, sought to assure that "all possibilities remain open" as it continues talks with the Treasury over potential changes to the terms of its participation in the scheme - or even not taking part at all.

It said: "Lloyds and HM Treasury are discussing possible changes to the commercial terms on which Lloyds might enter into the government Asset Protection Scheme (APS) from those announced in March 2009, including the possibility of reducing the amount of assets covered by the scheme.

"Lloyds is also considering possible alternatives to entering into APS and is in discussions with HM Treasury, UK Financial Investments and the Financial Services Authority in this regard."

Today's comments follow mounting rumours that financial regulators had poured cold water on the bank's plans to withdraw from the toxic loans insurance scheme.

The bank had reportedly planned to raise enough money to allow an exit from the APS.

But the Financial Services Authority (FSA) is said to believe the bank needs more cash to give it enough security.

It is understood the FSA has performed "stress tests" on the Lloyds plan to see what would happen if the economic recovery stalled and found the bank would need more than £20 billion to get through the tests.

Previously, the bank was going to place £260 billion of toxic loans in the APS, buying insurance from the Government for £15.6 billion in shares.

This would have raised the state holding in the bank from 43 to 65 per cent.

Lloyds is keen to keep the State shareholding to below 50 per cent, according to reports, but Treasury concerns are believed to centre on the impact of any mammoth investor cash call on its shares.

The taxpayer could also have to pump in billions of pounds more to finance such a deal.

Lloyds said today it was focused on ensuring the alternatives to APS under consideration "would be in the interests of shareholders and other stakeholders".

A decision not to allow Lloyds to lessen its participation in APS or withdraw altogether is likely to deliver a blow in its talks with the European Commission over remedies for receiving State aid.

The EC is already widely expected to impose draconian measures on Lloyds, which could see it forced to offload Halifax or large parts of the HBOS group it bought as a rescue deal in last autumn's financial crisis.