Saturday March 7, 09:01 PM
Britain takes majority stake in Lloyds Banking Group
By Robin Millard
LONDON (AFP) - The British government said Saturday it will take a majority stake in Lloyds Banking Group (LSE: LLOY.L - news) and guarantee its toxic assets, leaving only two major British banks outside the state's control.
The state will increase its ownership of the group from 43 percent to 65 percent and insure 260 billion pounds (290 billion euros, 365 billion dollars) worth of its riskiest assets.
Under the terms of the government's asset protection scheme, Lloyds has to take the first loss "hit" of up to 25 billion pounds on toxic assets before the government steps in, with the bank liable for 10 percent of further losses.
Lloyds will pay 16 billion pounds for participating in the scheme.
As a key part of its second bail-out, Lloyds has pledged to lend a further 28 billion pounds over the next two years in a bid to get the economy moving, with the majority going to companies rather than individuals.
Barclays (LSE: BARC.L - news) and HSBC (LSE: HSBA.L - news) remain as the only major British high street banks not controlled by the state, following the bail-out of Royal Bank of Scotland (LSE: RBS.L - news) (RBS).
The British government has taken a series of steps to try to restore confidence in the banking sector and get credit flowing again.
"This agreement with Lloyds is another vital step in our efforts to clean up banks' balance sheets and give them the strength and confidence to increase their lending," said Alistair Darling, Britain's finance minister.
"Restoring our banks to full health and ensuring that they are able to support creditworthy families and businesses is an essential part of any plan for recovery," he added.
"If we and other countries don't fix our banking systems we won't fix the rest of the economy."
Both Lloyds and the Treasury said full nationalisation was not on the cards.
Treasury minister Stephen Timms told BBC television: "By ending the uncertainty on the valuation on those assets, as far as the Lloyds balance sheet is concerned, it's able to commit to additional lending -- 14 billion pounds this year and an anticipated additional 14 billion pounds next year."
"Step by step, we are filling the gap created by the withdrawal of non-UK banks from the UK market," said Timms, a lending shortage he valued at around 100 billion pounds.
Lloyds Banking Group was created in January when Lloyds TSB bought rival lender HBOS, which faced collapse because it was struggling to raise funds due to the credit crunch.
Some 83 percent of the toxic assets going into the insurance scheme come from HBOS's books, compared with just 17 percent from those of Lloyds TSB.
The deal will pile pressure on Lloyds Banking Group chairman Victor Blank -- who orchestrated the HBOS deal -- and chief executive Eric Daniels.
They were already facing questions about whether the cost of absorbing HBOS was worth it.
Daniels sounded a bullish note after the deal, saying it "substantially reduces the risk profile of the group's balance sheet" and would ensure it can "emerge strongly when the economy recovers".
Last month, the bank announced that HBOS made a record pre-tax loss of 10.8 billion pounds for 2008 and wrote off 9.9 billion pounds worth of bad consumer loans.
Lloyds meanwhile made an 819 million pound profit, down 75 percent on the year before.
The deal means that the Treasury has a controlling interest in yet another British bank, with smaller lenders like Northern Rock (LSE: GB0001452795.L - news) nationalised and Bradford and Bingley (LSE: BB.L - news) bailed out.
RBS, which is 70 percent state-owned, has already signed up to the government's asset protection scheme to insure assets worth 325 billion pounds.
In return, it has promised to lend 25 billion pounds to British consumers and businesses this year.
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