FSA may probe Lloyds cash call

The country's market regulator, FSA, is stress-testing banking group Lloyds' plans to raise 10 billion pounds and reduce its dependence on a state-backed toxic debt insurance scheme, The Daily Telegraph reported in its Wednesday issue.

Citing "insiders" the newspaper said Lloyds, 43 percent state owned, submitted formal proposals to the Treasury to raise capital through a rights issue and shrink its involvement in the asset protection scheme (APS) below the agreed 260 billion pounds.

The City watchdog is currently checking the bank would have enough capital to survive a worsening recession and an escalation in bad debts. A spokesman for the banking group declined to comment.

The FSA was not immediately available for comment.

The newspaper said FSA has eased its stress tests since March, when the economic outlook was worse, which could offer Lloyds "some flexibility."

The tests are still expected to be far more intense than Lloyds' forecasts of 1.8 percent economic growth next year and stable house prices.

Lloyds wants to reduce its participation in the APS because it considers the fee too expensive and fears it will hand the taxpayer too large a stake.

One of Lloyds top 15 shareholders told Reuters on Tuesday that the banking group had not canvassed major investors over a potential rights issue.

Lloyds raised 4 billion pounds from shareholders earlier this year.