09 Mar 2009, Joel Clark, Risk magazine
Lloyds agreed on Friday night to participate in the asset protection scheme, ending a week of negotiations with the UK Treasury over the terms of the deal.
Lloyds will put toxic assets with a par value of £260 billion into the insurance scheme, including £151 billion of corporate and commercial loans, £74 billion of residential mortgages, £18 billion of unsecured personal loans and £17 billion of treasury assets - the assets were written down to a total carrying value of £250 billion in December last year. The bank will pay a participation fee of £15.6 billion over seven years and will be responsible for a first loss of £25 billion on those assets as well as 10% of any further losses. The Treasury will bear the remaining 90% of losses.
The move comes after Lloyds confirmed last month that Halifax Bank of Scotland (HBOS), which it acquired in January, lost £10.8 billion in 2008 with heavy losses in corporate lending. 83% of the troubled assets covered by the scheme come from HBOS' lending books. The government support comes on the condition that Lloyds increase its lending by £14 billion over the next 12 months, entailing £3 billion more mortgage lending and £11 billion more business lending.
"Participating in the government's asset protection scheme substantially reduces the risk profile of the group's balance sheet," said Eric Daniels, group chief executive of Lloyds. "Our significantly enhanced capital position will ensure that the group can weather the severest of economic downturns and emerge strongly when the economy recovers."
Lloyds is the second bank to participate in the asset protection scheme, after Royal Bank of Scotland committed £302 billion on February 26. Barclays is widely expected to be the next participant as it commences talks with the Treasury this week.