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Has Lloyds bank been holed below the waterline?

As Lloyds bank comes to terms with the fact that the FSA (Financial Services Authority) has today rejected the company's bid to try and escape the UK government's toxic debt insurance scheme, it will be interesting to see how investors respond to this latest news. The company has for some time been suggesting that it could escape the clutches of the UK government which holds a 43% stake in the business. However, the failure of the bank to pass the FSA stress test after taking into account the toxic debt insurance scheme and the liquidity available in the business is an embarrassment for the board of directors.



Even though there is some short-term disappointment at the failure to pass the stress test, the company is most certainly in a stronger position than it was only a few months ago. Despite concerns that more HBOS loans could go "bad", investors appear willing to look further ahead and take into account the fact that the company's balance sheet is stronger today than it has been for some time. It could be claimed that the company is currently in a consolidation period after which time the balance sheet should be strengthened and the company should in due course be able to grow again.

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