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Fsa Stress Tests Lloyds Fund-raising Proposal

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In the past few days, Lloyds has submitted formal proposals to the Treasury to raise capital through a rights issue and shrink its involvement in the asset protection scheme (APS) below the agreed £260bn. The City watchdog is currently testing the plans to check they would give the bank enough capital to survive a worsening recession and an escalation in bad debts.

Although the details of the capital raising are not clear, they are believed to include a rights issue of up to £10bn and sales of assets such as Scottish Widows, Clerical Medical and Lloyds’ stake in St James’s Place as well as other fund-raising measures.

However, news that the Treasury has handed the proposals to the FSA demonstrates how seriously the Government is taking them and offers the clearest indication yet that Lloyds will be allowed to renegotiate its involvement in the APS.

Lloyds was forced to take part in the APS in March after the FSA decided it did not have enough capital to survive the recession. At its half-year results, it revealed its core tier-one capital ratio – a key measure of financial strength – had fallen to 6.3pc. Under the existing APS arrangement, Morgan Stanley estimated Lloyds’ core tier-one ratio would be 14.5pc.

Insiders said the FSA has eased its stress tests since March, when the economic outlook was worse, which could offer Lloyds some flexibility. However, the tests are still expected to be far more intense than Lloyds’ forecasts of 1.8pc economic growth next year and stable house prices.

The FSA will set the parameters of the new tests in collaboration with the Bank of England, which is also gloomier than Lloyds.

Lloyds wants to reduce its participation in the APS because it considers the fee too expensive and fears it will hand the taxpayer too large a stake. The £15.6bn of “B†shares issued used to pay for insurance on £260bn of Lloyds’ “toxic†debts will give the taxpayer a 62pc economic interest in the bank.

A rights issue would need the support of the Government, as 43pc shareholder, and institutions. If the Government does decide a rights issue is in taxpayers’ interests, it will need minority shareholders’ backing. Institutional opinion appears to be split, with some describing a rights issue as a “no-brainer†and others expressing concerns that “Lloyds is being too optimisticâ€.

So Lloyds are trying rig the figures. 1.8% growth next year, that won't happen without huge govt stimulus, money we haven't got.

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