The merged bank will now be taken into closer government control, after agreeing to ringfence its toxic assets into a special taxpayer-backed insurance scheme.
Details of the government's insurance deal with the Lloyds Banking Group have been announced.
The taxpayer is now set to up its stake in the part-nationalised bank, created through the merger of Lloyds TSB and HBOS in January, from 45 to 65 percent. The government has also agreed to insure the bank against losses from £260 billion of "toxic assets" stored on its balance sheet, with Lloyds paying around £15 billion as a premium.
It is hoped that this scheme will boost loans lending from the banks, heading off the worst effects of the credit crunch and encouraging economic growth. However, potential future losses in value of the toxic assets could prove a heavy burden for the public purse.
The government's extra control over the bank, achieved through its increased equity stake, could also signal a tougher attitude on staff bonuses. Sir Victor Blank and Eric Daniels, formerly of Lloyds TSB, are also likely to come under pressure, as shareholders call on them to resign for agreeing to the merger with HBOS in the first place.
This is because the latter bank's poor performance in the credit crunch - with declared losses of £11 billion for 2008 - is widely seen as having forced the merged group to seek the additional assistance from the taxpayer. Stock values also plunged over recent months at both banks, with the merged Lloyds group now trading at just 40p per share.
Figures from the insurance scheme also reveal that around 83 percent of the assets to be covered by the insurance come from loan books at HBOS, including UK commercial and residential mortgages and commercial and personal loans on which the borrowers involved seem likely to default in large numbers.
News of the deal follows RBS' entering into a similar scheme with the government last month. Around £325 billion of its toxic assets were insured in this way, while reports today suggested that Barclays could also soon enter into a scheme.
