UK government takes majority stake in bank

The global economic slowdown is producing big losses in the British banking industry.
The UK government confirmed Saturday that it will take majority control of Lloyds Banking Group, with the taxpayer owning 65 percent of voting shares in return for insuring £260 billion ($366 billion) of the group’s toxic assets.

The British Press Association reported that the deal with the Treasury would see Lloyds commit to lend at least £28 billion ($40 billion) over the next two years. In return the government will insure the bank’s riskiest loans. As a result its holding in the bank will increase from 43 percent to 65 percent of voting shares, PA reported. The government’s fee for limiting Lloyds’ losses from the bad assets is £15.6 billion ($22 billion). Under the scheme, the bank will take the first hit of up to £25 billion ($35 billion) on toxic assets before the taxpayer steps in. Treasury chief secretary Stephen Timms told BBC Radio 4’s Today program that he believed in due course Lloyds was “going to be a strong and successful bank.” “The arrangements that we have been able to facilitate I think will ensure that this is going to be the case.”

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Lloyds Banking Group was formed following the merger between HBOS and Lloyds TSB, a deal encouraged by the government, last year. It began trading for the first time in January. However, the acquisition of HBOS has proved a greater drag on Lloyds than previously expected. Nearly two weeks ago Lloyds announced HBOS made a £10.8 billion ($15.5 billion) pre-tax loss for 2008. Lloyds itself posted an 80 percent plunge in pre-tax profit to £807 million ($1.1 billion), which was in line with figures released in a trading update earlier this month. The bank said the 2008 results were the product of “difficult market conditions” marked by a significant decline in credit quality and the fall in the UK property market. The UK government took a stake in both HBOS and Lloyds TSB last October as part of the bailout of banks hit by toxic debt.