Lloyds looks at liquidity swap with its Scottish Widows arm

City A.M. Reporter
LLOYDS Banking Group is contemplating an asset swap with its Scottish Widows life insurance division to shift illiquid assets off the bank’s balance sheet, sources said yesterday.

The bank, which is 40 per cent owned by the taxpayer, held talks with the Financial Services Authority this month to discuss a £1bn liquidity swap with its life insurance subsidiary Scottish Widows, a source said.

Lloyds has considered a liquidity swap with the business but an improved funding profile has pushed a swap deal down the agenda, a second source added.

Lloyds and the FSA both declined to comment.

Lloyds has improved its liquidity position substantially over the past six months, boosting primary liquid assets on its balance sheet by 11 per cent from £94.8bn to £105bn, according to its interim results announced last Thursday.

Liquidity swaps, in which banks borrow high-grade bonds from insurers using a larger pool of less liquid assets as collateral, are designed to free up lenders’ balance sheets at a time when traditional bank sector funding remains scarce.