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Lloyds Group (NYSE:LYG) has responded to press speculation in relation to its potential involvement in the government’s asset protection scheme (GAPS). Some commentators suggest the bank failed in its efforts to withdraw from the scheme following its inability, allegedly, to raise sufficient capital to meet the Financial Services Authority capital adequacy requirements. Lloyds presented plans to the FSA outlining a £15bn capital raising program which included a combination of a rights issue and preference share conversion.

Press reports indicate the FSA rejected the proposal citing a stress test failure and reminded the bank of its obligation to meet lending targets detailed within the insurance scheme agreement made earlier in 2009. The government currently owns 43% of LYG stock.

Lloyds has also suffered the embarrassment of industry insiders questioning the “overly optimistic” growth forecasts the bank included in its recent interim statement in which Lloyds predicted UK economic growth next year of 1.8%, at the very top end of economists’ forecasts.

The bank’s statement on Friday confirmed it was still in discussions with the HM Treasury regarding its potential participation in the GAPS.

Lloyds clearly has one eye on the improving global economy, a more optimistic view of its loan book quality and is seeking to downsize its involvement in the government scheme. Lloyds also stated that it is “considering possible alternatives to entering into GAPS” and that all “possibilities remain open”.
Shareholders are in for a volatile, interesting and stressful week and developments are likely to change by the day.

Source: Lloyds Looks to Downsize Involvement in Asset Protection Scheme