In a clear indication that the UK government is willing to let Lloyds free from its toxic asset insurance scheme, Alistair Darling, finance minister of UK, is expected to allow the bank to test its capital raising plan of GBP25 billion – reported The Financial Times.
Reportedly, the bank, 43% owned by the UK, is in talks with underwriters at UBS and Bank of America Merrill Lynch, to combine a rights issue of approximately GBP15 billion with the conversion of up to GBP10 billion of existing debt into instruments convertible into equity.
If Lloyds’ plan succeeds, it may consider exiting from the costly government backed toxic asset insurance scheme to insure GBP260 billion of toxic assets against losses from bad debts at a cost of GBP15.6 billion over the next five years, payable in shares.
Mr Darling said that the banks’ plan to raise private capital could be in the interest of public, but he would reserve the right to withdraw approval for the plan if the move is too risky.
An official close to the negotiations between the bank and Treasury, said: "Bringing the private sector in to share the risk ought to be a good thing in principle. Alistair Darling wants to market-test this idea to make sure it can be done and that the terms are right," reported the newspaper.
