Lloyds: compensating taxpayers

The Chancellor isn't going to let Lloyds out of the Government Asset Protection Scheme (GAPS) without extracting a price.

The Treasury saved Lloyds earlier this year by promising to provide it with the protection of GAPS - which was a statement that taxpayers would absorb 90% of future losses on £260bn of poor quality loans and investments.

In that sense, taxpayers were giving a valuable pledge that losses Lloyds may incur on reckless loans would not kill the bank (to be fair to Lloyds, most of those reckless loans were made by HBOS, the bank it bought in such controversial circumstances).

So even if GAPS has not yet been created in a formal sense, Lloyds has been benefitting from the offer of GAPS for months: taxpayers have been keeping the bank's head above water.

How much should Lloyds now pay for being kept out of Davy Jones's locker by Alistair Darling?

Well a 1-1.5% fee on the implicit increment to Lloyds' capital generated by the APS would seem a reasonable starting point for negotiations.

That de facto capital increment was just under £16bn. So a 1% fee would see Lloyds paying just over £150m to the Exchequer.

Lloyds' board may haggle about the size of the break fee - but I am told its directors are reconciled to paying something.

And they also know that the Chancellor will force the bank to honour one very important commitment it gave when initially agreeing to the APS - and that was to increase by £14bn the volume of credit it makes available to businesses and households.