Lloyds in talks with the govt and the financial regulator over “possible alternatives” to the asset protection scheme

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    Lloyds said it may scale back or cancel its participation in a state-backed scheme to insure it against credit losses, as a healthier economy has improved the outlook for bad debts.

    The part-nationalised bank on Friday confirmed for the first time that it was in talks with the government and the financial regulator over “possible alternatives” to the so-called asset protection scheme (APS), without providing further detail.

    “All possibilities remain open,” Lloyds said.

    Industry sources said last month that Lloyds was exploring ways of sidestepping the scheme, seen as expensive and potentially unnecessary following an upturn in the economy since it was first negotiated in March.

    But analysts say an outright withdrawal from the programme would be difficult as the bank would have to raise up to 20 billion pounds ($32.70 billion) of fresh capital — representing the biggest cash call on record — to satisfy regulators that it could absorb further credit losses on its own.

    “The idea of Lloyds exiting the APS is unlikely primarily because raising 15 to 20 billion pounds isn’t a viable option,” said Exane BNP Paribas analyst Ian Gordon.

    “The consensual position in the market is that Lloyds will end up with a hybrid of a slightly scaled-back APS, plus some capital raising.”

    According to Reuters reported on Thursday that the Financial Services Authority had set tougher-than-expected capital conditions on Lloyds’ potential exit from the scheme, making an outright departure less likely.

    Two of Lloyd’s biggest shareholders told Reuters last month that there was little enthusiasm for a cash call from the bank, which has already raised 4 billion pounds from investors this year.

    Under an outline deal unveiled in March, Lloyds is to hand 15.6 billion pounds in shares to the government in return for taxpayer-funded insurance against losses on 260 billion pounds of risky debt-backed assets. Final details of the programme have not been agreed.

    Lloyds, 43 percent owned by the government after an emergency 17 billion pound bailout last year, is also eager to limit its involvement in the APS because of concerns that its heavy reliance on state aid may prompt European regulators to order disposals. (Edited by Rupert Winchester)