RPT-COLUMN-Lloyds must pay to escape state support:P.Thal Larsen

(Repeats to remove story attached to bottom of text) -- Peter Thal Larsen is a Reuters columnist. The views expressed are his own --

By Peter Thal Larsen

LONDON, Sept 4 (Reuters) - One by one, banks are wriggling out of their government safety nets. Lloyds Banking Group (LLOY.L) is the latest to plot a partial escape by scaling back its use of Britain's insurance scheme for toxic assets.

Revising the deal has obvious attractions for Lloyds. Before agreeing any changes, however, the British government should make sure taxpayers are being properly compensated for the guarantees they have already supplied.

When it was conceived in January, Britain's asset protection scheme (APS) looked a clever way to shore up ailing banks while avoiding outright nationalisation.

Lloyds, hobbled by its disastrous takeover of rival HBOS, gratefully signed up to insure losses on assets worth 260 billion pounds -- a quarter of its loan book. But it never finalised the details and, now that Armageddon has been avoided, chief executive Eric Daniels and Sir Win Bischoff, the bank's incoming chairman, are having second thoughts.

Lloyds is touting a plan to scale back the assets it puts into the APS, perhaps by as much as half. This would shrink the fee it has to pay for the insurance. At the same time, Lloyds would raise as much as 10 billion pounds in fresh capital -- through share issues and disposals -- to support the assets that will now remain on its balance sheet.

The plan appeals to Lloyds because it would reduce the government's shareholding in the bank. It could also allow Lloyds to drive a harder bargain with competition regulators in Brussels, who want it to shrink in return for receiving state aid.

Nevertheless, there are several hurdles. Chief among these is that the government, currently a 43.5 per cent shareholder, would have to participate in any share issue -- increasing its exposure to Lloyds when it would rather be selling.

Ministers would also need to make sure Lloyds is not simply cherry-picking the worst loans, while regulators would have to be convinced the bank has enough capital to weather future losses.

Yet these calculations ignore the fact that Lloyds has already enjoyed considerable support. The bank's shares have soared 125 per cent from their January lows as shareholders realised they were not about to be wiped out.

To get an idea of what this support is worth, it's worth looking at Bank of America (BAC.N), which is also attempting to wriggle free from state support.

Back in January, the U.S. authorities promised to insure BofA against losses on toxic loans worth $118 billion. Four months later, BofA backed out of the deal.

According to the Wall Street Journal, the United States has asked for $500 million in compensation. This is roughly equivalent to a fee of 0.1 per cent of the insured assets, per month. Using the same calculation, Lloyds should be paying about 1 billion pounds.

Pragmatists may argue that, as the government is already Lloyds' largest shareholder, any such arrangement would involve the state transferring value to itself. Nevertheless, if the government wants to avoid the accusation that it is letting the banks off the hook, it must be seen to be getting a good deal for taxpayers. What better way than by extracting a large fee? For previous columns, Reuters customers can click on [LARSEN/] (Editing by Martin Langfield)