Lloyds Banking Group is reportedly holding talks with the FSA over plans to boost funding by swapping illiquid assets for assets held by Scottish Widows.
Sources have told Reuters Lloyds is planning a liquidity swap which would see the bank borrow higher quality bonds from Scottish Widows with less liquid assets used as collateral, with the bank aiming to take on about £1bn of assets.
Liquidity swaps benefit banks as they can provide alternative funding when more traditional funding is limited. Insurers also benefit from higher returns than they would otherwise make.
FSA guidance published in February stated liquidity swaps can help to free up lenders’ balance sheets but the risks of insurers and banks becoming more closely aligned need to be carefully managed.
Where swaps occur within the same parent company the FSA says the interests of the overall group should not override the interests of its subsidiaries.
Lloyds declined to comment.