Britain's Lloyds Banking Group said it was in talks over scaling back or cancelling its participation in a state-backed scheme to insure it against credit losses.
Lloyds is discussing a reduction in the number of toxic assets it might place in the so-called asset protection scheme (APS), encouraged by "improving economic conditions," the part-nationalised lender said in a brief statement on Friday.
The bank said it was also in talks with the government and the financial regulator over "possible alternatives" to entering the scheme, without providing further detail.
"All possibilities remain open," Lloyds said.
Lloyds shares were down 1.5 percent at 108 pence by 0915 GMT, while the FTSE 100 share index was flat.
Regulators have insisted that any move by Lloyds to reduce or cancel its participation in the APS be accompanied by a capital-raising to provide a buffer against further losses on risky debt-backed assets.
CAPITAL QUESTION
Analysts estimate it would have to raise up to 20 billion pounds ($32.70 billion), representing one of the biggest capital-raisings on record, if it were to quit the APS.
Reuters reported on Thursday that the Financial Services Authority had set tougher-than-expected capital conditions on Lloyds' potential exit from the scheme, making an outright departure less likely.
"The consensual position in the market is that Lloyds will end up with a hybrid of a slightly scaled-back APS, plus some capital raising," Exane BNP Paribas analyst Ian Gordon said.
"The idea of Lloyds exiting the APS is unlikely primarily because raising 15 to 20 billion pounds isn't a viable option."
Lloyds was reported last month to be considering a rights issue of up to 15 billion pounds, but two of the bank's biggest shareholders told Reuters there was little enthusiasm for a cash call.
Under an outline deal unveiled in March, Lloyds is to hand 15.6 billion pounds in shares to the government in return for taxpayer-funded insurance against losses on 260 billion pounds of risky debt-backed assets, but final details of the programme have not been agreed.
The bank, 43 percent owned by the state, is now anxious to scale back its reliance on state, amid concerns that European regulators may force it to sell some units in response to competition concerns.
Lloyds has also said that its loan book is performing better than had been expected when the original APS terms were negotiated, estimating last month that bad debts had peaked during the first half of the year.
