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Lloyds bank insurance scheme fails FSA stress test

Lloyds bank has been dealt a bitter blow today with news that the company's proposal to sidestep the UK government's toxic debt insurance scheme has been rejected by the Financial Services Authority (FSA) on the grounds that the company could not raise sufficient capital to withstand potentially escalating bad debts. Lloyds bank has for some weeks now been contemplating a £15 billion rights issue which the company believes would be more than enough to allow the group to withdraw from the government's toxic debt insurance scheme, although the FSA believes a figure in the region of £25 billion would be required.

Using FSA calculations, it is estimated that the toxic debt insurance scheme is the equivalent of raising £25 billion for the company which would leave Lloyds bank around £10 billion short. This ruling also puts the FSA and the Lloyds bank board of directors at loggerheads because it looks as though the FSA has taken a more downbeat view of the immediate outlook for Lloyds bank. Quite how the UK stock market will take his knockback remains to be seen because Lloyds bank shares have taken part in the recent rally, in the hope that the toxic debt insurance scheme could be sidestepped.

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