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State aid: Commission approves restructuring plan of Lloyds Banking Group

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The European Commission on Wednesday cleared Lloyds Banking Group's restructuring plan, which it said will leave behind a much more streamlined bank.

Competition Commissioner Neelie Kroes said: "This plan effectively addresses the Commission's competition concerns and at the same time ensures the return of Lloyds Banking Group to long term viability. This decision once again demonstrates the important role that the EU's state aid rules play in facilitating sustainable bank restructuring whilst preventing undue distortions of competition. This is to the clear benefit of both customers and taxpayers".

Under a package of financial support measures approved by the Commission on 13 October 2008, the Lloyds Banking Group received a state recapitalisation of £17 billion (some €19 billion). The approval of this recapitalisation was conditional upon the submission of a restructuring plan. This plan was submitted to the Commission on 16 July 2009 and contained additional state aid measures. Having assessed the past and new aid on the basis of the notified plan, and in view of amendments agreed by the UK authorities, the Commission is satisfied that it is in line with its restructuring communication and as such compatible with EU rules on state aid to remedy a serious disturbance in a Member State's economy Article 87(3)(b) of the EC Treaty. In particular, the measures foresee that Lloyds will pay a significant proportion of the restructuring costs, ensure a sustainable future for Lloyds without continued state support and that there will not be undue distortions of competition.

The Lloyds Banking Group is the entity resulting from the acquisition of HBOS by Lloyds TSB in January 2009. In 2008, HBOS was close to bankruptcy as a result of risky lending practices and high dependence on wholesale funding. In light of the systemic importance of HBOS to the UK financial system, the UK Government facilitated the takeover of HBOS by Lloyds TSB, notably by making a £17 billion (€19billion) capital injection in the bank, which gave the UK State 43.5% ownership of Lloyds Banking Group.

On 7 March 2009, the UK authorities and Lloyds announced that the bank would take part in the UK's Asset Protection Scheme, under which the State would commit to refund losses exceeding a certain level on a pool of assets of £265 billion (€296 billion). At the same time, the State committed to underwrite and to participate in a share offer of £4 billion (€4.6 billion), which was completed in June 2009. On 3 November 2009, as an alternative to Lloyd's participation in the UK Asset Protection Scheme, a capital raising share offer of £20.5 billion capital was announced. The Commission found that the State's participation in this share offer for an amount of £5.9 billion (€6.6 billion) constitutes a state aid element, since it facilitated the placing of the shares. This was therefore also assessed in the framework of the restructuring plan.

The overall assessment was carried out on the basis of the Commission's Communication on restructurings in the financial sector in the current crisis.

The Commission considers that the proposed measures are appropriate. They are targeted at ensuring Lloyds Banking Group's return to long term viability by exiting all non-core business lines and risky portfolios (mainly inherited from HBOS) and implementing Lloyds TSB's prudent risk management practices.

The Commission also found that the plan ensures a fair burden sharing of past losses and that the bank and its capital providers make a significant contribution to the financing of the restructuring costs. These elements are important to limit moral hazard (the risk that a company may take excessive risks if it considers it will not have to pay for the consequences) and distortions of competition.

In addition, the plan contains a divestment package in Lloyds Banking Group's core business of UK retail banking as a measure to limit the impact of the aid on competition. The divested entity will have a 4.6% market share in the personal current account market gained through a network of at least 600 branches. This proposed divestment package will facilitate the entry of a new competitor or the reinforcement of a smaller existing competitor on the UK retail banking market and will therefore remove the distortions of competition created by the aid.

Finally, the Commission found that the exit fee which will be paid by Lloyds Banking Group for not participating in the Asset Protection Scheme is sufficiently high to compensate for the advantage the bank gained from its announced participation of 7 March 2009.

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