LLOYDS Banking Group&rsquo;s hopes of avoiding participation in the government&rsquo;s Asset Protection Scheme (APS) were dashed yesterday, as the Financial Services Authority (FSA) said the bank did not have sufficient capital to spurn the facility.<br /><br />FSA officials, who have been stress testing the bank, have told Lloyds that the level of capital it would have to raise to be considered healthy enough to ditch the APS would be impossible to secure from investors.<br /><br />City A.M. understands that board members had floated the possibility of exiting the APS altogether, but are now focusing instead on a share placing that would allow the bank to shrink the asset portfolio it insures, or pay for the scheme partly in cash.<br /><br />Chief executive Eric Daniels is keen to avoid the government increasing its stake above its current 43 per cent holding, which would be unavoidable if, as under the existing agreement, Lloyds pays &pound;15.6bn in &lsquo;B&rsquo; shares to insure &pound;260bn worth of assets.<br /><br />But if Lloyds can successfully raise funds from institutional investors, it may be able to keep the government stake below 50 per cent, a figure that Daniels considers a key watermark.<br /><br />Credit Suisse analyst Jonathan Pierce has estimated that the bank would have had to raise &pound;25bn to avoid the APS entirely, a sum that would exceed by far the largest capital-raising in UK history.<br /><br />Lloyds is also waiting to hear whether European Commission competition commissioner Neelie Kroes will demand that it dispose of units in return for approval of state support.