HM Treasury

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07 March 2009

Asset Protection Scheme - agreement with Lloyds

The Government is today announcing an agreement in principle with Lloyds Banking Group (Lloyds) to participate in the Asset Protection Scheme. The Government is also agreeing to convert its preference shares in Lloyds to ordinary shares. As set out in the announcement last week, the Asset Protection Scheme aims to remove uncertainty about the value of banks' past investments and this package of measures will allow Lloyds to increase its lending to the UK real economy.

Under the agreement Lloyds will place £260bn of assets into the Asset Protection Scheme, focusing on those assets where there is the greatest degree of uncertainty about their future performance.  Lloyds will pay a participation fee of £15.6bn to the Treasury in capital, more details of which are set out in the term sheet accompanying the Lloyds press release issued today. The agreement will mean that in the event of a loss, Lloyds will bear a first loss amount after existing impairments of up to £25bn. In return Lloyds will make additional lending commitments totalling £3bn of mortgage lending and £11bn of business lending over the next 12 months. A similar lending commitment has been made in respect of the subsequent 12 months but this will be reviewed to ensure it reflects economic circumstances at that time.

In addition to the requirements on remuneration imposed as part of the recapitalisation last October, Lloyds has agreed to review its existing remuneration policy and implement a policy consistent with the detailed principles set out in the Financial Services Authority’s (FSA) Code of Practice on Remuneration Policies.
The Government, in consultation with UK Financial Investments (UKFI), has also today agreed that on implementation of the Asset Protection Scheme for Lloyds it will replace the Treasury’s £4 billion of preference shares in Lloyds with new ordinary shares, with the aim of supporting stability in the financial system; ensuring continued protection for ordinary savers, depositors, businesses and borrowers; and safeguarding the interests of the taxpayer.

The new ordinary shares will be issued at a price of 38.4 pence per share. The preference shares will be replaced at 101 per cent of their issue price, together with accrued dividend.  Existing shareholders will be given the opportunity to purchase the ordinary shares pro-rata to their existing shareholdings. The Treasury will take up its pro-rata share of the open offer and so maintain its minimum voting share at 43.5 per cent. The Treasury will also subscribe for any additional shares not taken up by existing shareholders.

This action will make available additional core tier 1 capital to the bank to strengthen its resources, enable it to absorb expected losses; and ensure the bank is able to meet its additional lending commitments.

If Lloyds shareholders do not purchase any of the new ordinary shares, the Government’s holding of ordinary shares in Lloyds will increase to 65 per cent as a result of the replacement of the preference shares. This, together with the shares issued in relation to the participation fee, will provide the opportunity for taxpayers to share in the long-term recovery of the bank.

However Lloyds will continue to be owned by private sector investors as well as by the Government. As the Government has made clear, private ownership and financing of British banks provides important commercial incentives. The Asset Protection Scheme helps to maintain these incentives and ensure that there will be an active market into which, over time, investments made by the Government can be sold, so that the Government can exit as soon as possible.

Today’s announcement follows an agreement in principle with the Royal Bank of Scotland announced on 26 February.

The Government will accept applications to the scheme from other eligible institutions until 31st March.  A key principle for engaging in discussions with the Government about the scheme is agreement to full and timely disclosure of all information across an institution’s balance sheet that the Treasury requires. 

Notes for editors

1. The general terms of the Asset Protection Scheme in relation to Lloyds, will be the same as the terms published on the 26th February 2009.

2. For further information and the term-sheet, relating to the new capital instruments to be issued by Lloyds, refer to the Lloyds Banking Group press notice.

3. Implementation of the Asset Protection Scheme will be subject to further due diligence by the Treasury and its advisers, execution of legally binding documentation, satisfaction of the application criteria and asset eligibility criteria of the Scheme, and satisfaction of applicable conditions precedent to accession to the Scheme including regulatory, state aid and shareholder approvals. 

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