Lloyds TSB backs HBOS with $16 billion loan: report

LONDON (Reuters) - British bank Lloyds TSB Group Plc (LLOY.L) is providing financial support to its takeover target HBOS Plc HBOS.L through a 10 billion pound ($16 billion) loan facility, Britain's Sunday Times reported.

The newspaper said the "covert agreement" showed how closely the two were working together ahead of Lloyds TSB's agreed acquisition of Britain's biggest home lender and said the scale of support was surprising.

A spokesman for Lloyds TSB declined to comment.

The former heads of Royal Bank of Scotland (RBS.L) and Bank of Scotland (now part of HBOS) have proposed to block the UK government-brokered takeover and say they believe HBOS can survive as a stand-alone business now the government has moved to recapitalize banks.

HBOS on Saturday rejected the proposal from Peter Burt and George Mathewson, who the BBC said wanted to step in to replace the current HBOS chief executive and chairman.

HBOS agreed to the offer by Lloyds, which will involve the British government taking a stake in the merged entity, after its share price was ravaged by the global financial crisis and concerns over its exposure to the weakening UK housing market.

The Sunday Times also said British banks had told Chancellor Alistair Darling they would not pass on any further interest rate cuts to customers, after most agreed to pass on the Bank of England's 1.5 percent cut on Friday.

"Base rates are now so low that our margins are desperately small," the newspaper quoted an unnamed bank executive as saying. "This point was made quite clear to the chancellor by several of the executives."

The Lloyds TSB spokesman also declined to comment on Friday's meeting with Darling, in line with other banks asked for comment on Friday.

Separately, Britain's Mail on Sunday said boutique investment bank European American Capital, headed by former Halifax and Royal Bank of Scotland treasurer Tim Goode, was advising an unnamed foreign bank on a possible rival HBOS bid.

Scottish businessman Jim Spowart, a former HBOS executive working on the rival bid, told the newspaper: "I would like to confirm that European American Capital is in discussion with the foreign bank.

"You will understand that for commercial reasons the bank still prefers to remain unnamed, but we hope to be in a position to confirm the situation this week," he added.

(Reporting by Myles Nelligan; Editing by David Holmes)