Sky News Exclusive: FSA considering revised Lloyds Banking Group plan to avoid Government’s Asset Protection Scheme

Sky News’ City Editor Mark Kleinman has just broken his latest exclusive business story on air, with more details appearing on his blog, ‘Kleinman’.  Mark’s blog entry at www.skynews.com/kleinman reveals that Lloyds Banking Group, in which the taxpayer owns a 43pc stake, has in the last week laid out a fresh blueprint before the City regulator that details how it might avoid participating in the Government’s scheme to insure toxic loans.

Mark wrote: ‘…Lloyds (which wants to extricate itself from the Asset Protection Scheme (APS) to avoid the Government’s stake in the bank creeping higher and paying the fees associated with the scheme) has decided that it can raise up to £25bn from private sources (such as asset sales, a rights issue of well over £10bn, and other, more complicated measures).’

He continued by explaining that the £25bn figure was significant because it’s around the same number that the Financial Services Authority thinks Lloyds needs to raise privately to have enough capital to withstand a renewed economic downturn when it doesn’t have the buffer of the toxic loans insurance.

According to Kleinman: ‘Under the original plan, Lloyds would place £260bn of loans into the APS. It’s pretty clear now that the eventual number will be lower. Lloyds said in a statement issued last month that it was “considering possible alternatives to entering into [the APS] and is in discussions with HM Treasury, UK Financial Investments and the Financial Services Authority in this regard”.

‘At that time, Lloyds felt it needed to raise less capital than the FSA did (a battle that only the regulator could win). There was a gap of about £6bn between the two sides, apparently.
As I understand it, the refined proposals offered by Lloyds acknowledge the higher figure suggested by the FSA, and are now being seriously considered by the FSA and the Treasury.

‘Essentially, unless the Government believes that Lloyds is not living in fantasy-land and really can get its hands on the new capital, it’s hard to see how Lloyds can avoid the APS altogether. That may then have implications for which assets Lloyds will be forced to sell off by the European Commission in return for the state aid it has received. It’s a fiendishly complicated process. But as I just said to Jeremy Thompson on Sky News’ Live At Five, raising this much money privately in the current environment might prove to be a pretty tall order.’

The blog entry ended on a cautionary note:  ‘A few words of warning: as people familiar with these discussions are at pains to point out, this is an evolutionary process, and what is on the table one day may be modified, enhanced or abandoned the next.

‘Equally, there may well be no final verdict on this for some time. I should also point out that Lloyds, the Treasury and the FSA are all declining to comment this evening.’

Mark joined Sky News in September from his previous role as City editor of the Sunday Telegraph, and since then has broken a series of off diary and big industry stories through the ‘Kleinman’ blog since then.