Lloyds still short of official approval for giant cash call

Treasury and FSA yet to sign off on the UK's largest ever rights issue
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The Independent Online

Lloyds Banking Group has been warned by the financial authorities that it should not get carried away as speculation over a £15bn rights issue reaches fever pitch. The bank has been battering down doors all over the City as it seeks support for the plan, which it hopes will enable it to evade the Government's asset protection scheme, which provides cover against losses made from toxic assets.

But Lloyds has yet to receive the crucial backing of its biggest shareholder – the British taxpayer. With more than 43 per cent of the shares, the Government's support would have to be obtained for the bank to be able to push ahead with plans for such an enormous cash call.

Lloyds is understood to have been told that the Treasury is unlikely to take a view until a plan has secured the approval of the Financial Services Authority – which itself is not yet a done deal.

It is understood that there will be no "wiggle room" allowed on the FSA's requirement that banks prove they hold tier one capital of 4 per cent in a "stressed" situation. This is above the minimum required under the internationally agreed Basel Capital Accords.

Asset disposals could be used to further buttress this safety net but the bank would have to receive the proceeds in cash rather than shares, complicating the process.

The life insurer Scottish Widows has long been seen as the most likely candidate for a sale, but there are a limited number of groups that are big enough to take on the company, and even they would be unlikely to want to pay entirely in cash. The most likely buyer has long been seen as Clive Cowdery's Resolution, which needs to do a deal fairly quickly so it can reap synergies following its acquisition of Friends Provident. But Resolution would want to pay mostly in its own shares, which are all but worthless for the purposes of strengthening Lloyds balance sheet.

Eric Daniels, Lloyds chief executive, is keen to avoid using the asset protection scheme because of the £26bn cost of the premium and because the EU would be likely to demand more concessions, under state aid rules, if Lloyds participates than if it does not. The EU is already likely to demand some disposals because of the dominant position the company has achieved in various markets following its creation from the shotgun wedding between Lloyds TSB and HBOS which spared the latter from collapse.

Neither the Government or the Financial Services Authority would comment last night. Lloyds said: "We do not comment on speculation. We issued a Stock Exchange announcement two weeks ago and our position has not changed since then. We have a number of options available to us and we continue to review them."