Lloyds gets clearance for Scottish Widows asset swap
LONDON Oct 15 (Reuters) - Britain's financial regulator has given the green light for Lloyd's Banking Group to go ahead with a plan to bolster its finances by swapping assets with its Scottish Widows life insurance arm, two sources familiar with the matter said.
Under the deal, Lloyds, in which the UK government has a 40 percent stake, will borrow over 1 billion pounds ($1.61 billion) of liquid assets held by Scottish Widows using a larger pool of lower quality securities as collateral, boosting its cash position amid a continued scarcity of bank funding.
Scottish Widows, which has lower liquidity requirements than Lloyds as its customers cannot withdraw cash overnight, stands to benefit from higher investment returns than it would make on its own portfolio of ultra-secure assets.
The Financial Services Authority has raised no objections to the transaction after three months of talks, and the deal is expected to complete imminently, one of the sources said.
Lloyds and the FSA declined to comment.
The so-called liquidity swap is the first in Britain between two businesses that form part of the same group.
The FSA had previously expressed concerns that such intra-group swaps could result in one of the companies accepting worse terms than they could get on the open market, potentially putting customers at a disadvantage.
The regulator last year also questioned whether liquidity swaps might intertwine insurers and banks more closely, making the financial system less stable in the event of a crisis.
That forced some banks to put planned deals on hold, although interest revived in February this year after the FSA said liquidity swaps were acceptable provided risks were managed properly.
Central banks have this year provided commercial lenders with cheap loans, easing the funding drought that has weighed on the sector since the 2008 crisis, and making the search for alternative sources of bank finance less critical.
But commercial banks continue to explore transactions such as liquidity swaps in an effort to diversify their sources of funding and wean themselves off government finance, bankers say.
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