Bank shares were under the spotlight once more yesterday as investors in Lloyds Banking Group endured a rollercoaster ride.
Markets initially gave the thumbs-down to the multi-billion rescue announced at the weekend — sending Lloyds down 14% at one stage — before the bank clawed back the losses to finish in positive territory.
Plans to insure £260bn of “toxic” assets in a taxpayer-backed scheme will bolster the bank’s finances, but will dilute existing shareholders and could give the taxpayer a stake of up to 77%.
But one City expert said the insurance could at least offer a degree of certainty over prospects for Lloyds, which eventually finished nearly 4% up.
But other banks remained in the red as reports suggested |Barclays could be next to take part in the Asset Protection Scheme.
It’s shares slid 5%, while HSBC fell almost 3%.
Both banks have so far avoided taxpayer support, but HSBC has been under pressure since calling on shareholders for a UK record £12.5bn last week.
Across the wider market, the FTSE 100 Index briefly touched fresh six-year lows before stronger oil stocks pulled blue chips back into the black, closing at 3542.4.
Under the bailout deal, Lloyds will pay a premium of nearly £16bn to take part in the scheme, more than Royal Bank of Scotland.
The deal has put chairman Sir Victor Blank and chief executive Eric Daniels under pressure for saddling the group with losses and bad assets.
HBOS last month reported annual losses of nearly £11bn.
It is thought that Lloyds is starting a series of meetings with investors today to garner support for the "toxic" asset insurance plan.
Shareholders will have their chance to vote on the deal at some stage, although Lloyds has not confirmed when this will take place.
Banking experts said the deal helped Lloyds overcome immediate capital strength concerns, but was expensive for the group and for shareholders.
Bruno Paulson, an analyst at Bernstein, said in a note: "The guaranteed asset protection scheme looks to be very thorough, in terms of virtually eliminating the risk of full nationalisation... but also in terms of diluting the existing shareholders."
Roger Lawson, chairman of the UK Shareholders’ Association (UKSA), which represents private investors, said Lloyds investors were left paying the price for a "disastrous" move to buy troubled HBOS.
"The general view of Lloyds investors is that Sir Victor Blank and the rest of the board should go," he said.
Lloyds chiefs have agreed to provide £28 billion of extra mortgage and business lending over the next two years to help drag the UK out of recession under its deal with the Government.
The State already owns a near-70% stake in rival group Royal Bank of Scotland after a similar rescue package finalised earlier this year.
Lloyds had to turn to the Government for help following its takeover of loss-making HBOS.
Ministers are thought to have forced through a far tougher package than wanted by the Lloyds board, which had fought to avoid the bank becoming majority public-owned.
The premium for insuring against losses on £260 billion of bad assets will be £15.6 billion, or about 6%.
By comparison Royal Bank of Scotland, which has struck a similar deal, is being charged £6.5 billion on the £325 billion of assets it has insured.
Lloyds will also have to take an initial hit of £25 billion on any losses before the insurance kicks in - whereas protection for RBS starts after £19.5 billion.
But yesterday Lloyds stood by its decision to take part in the Asset Protection Scheme and said it was fully behind its management team.
A spokesman said: "Our board is very much behind our management.
"The board unanimously cleared our participation in the Asset Protection Scheme and the acquisition of HBOS.
"Our directors know that the short-term outlook could be challenging and that has proved to be the case.