Skullduggery Of The Week

Rumours now abound that Lloyds Banking Group failed the FSA stress test*:

Some commentators suggest the bank failed in its efforts to withdraw from the [Government's asset protection] scheme following its inability, allegedly, to raise sufficient capital to meet the Financial Services Authority capital adequacy requirements...

Press reports indicate the FSA rejected [Lloyds'] proposal, citing a stress test failure and reminded the bank of its obligation to meet lending targets detailed within the insurance scheme agreement made earlier in 2009.

The government currently owns 43% of LYG stock.

OK. There are several vested interests here; the government; the FSA (a vast bureaucracy imposed on the banking system by, and controlled by, the government); and Lloyds Banking Group (which is said to be 43% owned by the government, which is highly misleading** but let's assume it's correct). The Labour Party is currently in government, but the Tory party is likely to win the election next year and has already indicated that it would scrap the FSA.

The question is, seeing as it must have been pretty clear for years that UK banks were racking up huge losses via their reckless lending policies (duly encouraged by the government), I wonder, which of the following explanations is most likely:

1. The government (via its agency the FSA) wants to show that Lloyds is not 'strong' enough to be freed from government control. This enables the government to force it to continue lending into a falling housing market in yet another desperate attempt to reflate the housing bubble (which appears to be the only economic variable that voters care about). The excerpt above hints at this: "... the FSA ... reminded the bank of its obligation to meet lending targets detailed within the insurance scheme agreement"

2. The FSA has to try and justify its continuing existence in the face of a Tory threat to disband it. The Tories can easily point to the FSA's total and abject failure to deal with the credit bubble over a period of years as a reason for doing so (not that the Tories would have done things any differently, as it is the Blue Wing of The Home-owners' party, but hey). So now the FSA are trying to show the world how tough they really can be.

3. Other banks may be very happy with this outcome, as it keeps one of the competition on the government leash. These other banks can encourage riskier borrowers to re-mortgage with Lloyds and clean up their own balance sheets.

4. Employees at the FSA department concerned are trying to wangle jobs at banks other than Lloyds, see point 3, who will look kindly on the FSA staff concerned when it comes to future recruitment (there is a revolving door policy as between banks and the FSA, even though on the surface they are supposed to hate each other as institutions).

5. It is quite possible that Lloyds failed the test deliberately. At present, they have a cushy existence as they can rely on the government to prop them up ad infinitum (using taxpayers' money, of course) even if they make idiotic lending decisions. The bankers can continue paying themselves handsome bonuses and live out their lives as overpaid quasi civil servants.

6. Thinking that last one through, it is possible that the employees at the FSA department concerned are trying to wangle jobs at Lloyds.

If anybody can think up any other permutations, please leave a comment.

* Via Lola. I believe that this is the stress test they carried out over three months ago, so they are not exactly fast.

** The government's economic interest may be vastly higher than that because it is insuring Lloyds' assets; or it may be lower as Lloyds is largely funded by bonds, not share capital, and the government only owns 43% of its share capital and not 43% of its bonds as well).