London - The British government said on Saturday it will take a majority stake in Lloyds Banking Group and guarantee its toxic assets, leaving only two major British banks outside the state's control.
The state will increase its ownership of the group from 43%to 65% and insure £260bn worth of its riskiest assets.
Under the terms of the government's asset protection scheme, Lloyds has to take the first loss "hit" of up to £25bn on toxic assets before the government steps in, with the bank liable for 10 percent of further losses.
Lloyds will pay £16bn for participating in the scheme.
As a key part of its second bail-out, Lloyds has pledged to lend a further £28bn over the next two years in a bid to get the economy moving, with the majority going to companies rather than individuals.
Barclays and HSBC remain as the only major British high street banks not controlled by the state, following the bail-out of Royal Bank of Scotland (RBS).
The British government has taken a series of steps to try to restore confidence in the banking sector and get credit flowing again.
"This agreement with Lloyds is another vital step in our efforts to clean up banks' balance sheets and give them the strength and confidence to increase their lending," said Alistair Darling, Britain's finance minister.
"Restoring our banks to full health and ensuring that they are able to support creditworthy families and businesses is an essential part of any plan for recovery," he added.
"If we and other countries don't fix our banking systems we won't fix the rest of the economy."
Both Lloyds and the Treasury said full nationalisation was not on the cards.
Lloyds Banking Group was created in January when Lloyds TSB bought rival lender HBOS, which faced collapse because it was struggling to raise funds due to the credit crunch.
Some 83 % the toxic assets going into the insurance scheme come from HBOS's books, compared with just 17% from those of Lloyds TSB.
The deal will pile pressure on Lloyds Banking Group chairperson Victor Blank - who orchestrated the HBOS deal - and chief executive Eric Daniels.
They were already facing questions about whether the cost of absorbing HBOS was worth it.
Daniels sounded a bullish note after the deal, saying it "substantially reduces the risk profile of the group's balance sheet" and would ensure it can "emerge strongly when the economy recovers".
Last month, the bank announced that HBOS made a record pre-tax loss of £10.8bn for 2008 and wrote off £9.9bn worth of bad consumer loans.
Lloyds meanwhile made an £819m profit, down 75% on the year before.
The deal means that the Treasury has a controlling interest in yet another British bank, with smaller lenders like Northern Rock nationalised and Bradford and Bingley bailed out.
RBS, which is 70% state-owned, has already signed up to the government's asset protection scheme to insure assets worth £325bn.
In return, it has promised to lend £25bn to British consumers and businesses this year.
- AFP