Business

How strong is Lloyds' recovery?

BBC business editor Robert Peston a return to profit for Lloyds Banking Group

Eric Daniels has no intention of quitting, even though there are some who feel that the disastrous loan losses incurred by Lloyds - stemming from the controversial takeover of HBOS in late 2008 - mean that he's not the right chap to lead the bank in the longer term.

Or at least that's what he told me.

Daniels says he wishes to stay at the helm to build on the recovery under way at the bank.

How firmly based is that recovery?

Well some would argue that Lloyds is still too dependent on funding from taxpayers and also from unreliable wholesale sources.

Only 61% of Lloyds' loans to customers are financed by deposits from customers, the lowest ratio for any big British bank.

The remaining 39% comes from wholesale sources - and, as banks learned the hard way after the credit crunch started on 9 August 2007, these wholesale providers of funds can vanish overnight.

Also £132bn of this wholesale finance comes directly or indirectly from taxpayers and central banks.

Most of that £132bn comes from the Treasury's Credit Guarantee Scheme and the Bank of England's Special Liquidity Scheme - both of which need to be repaid by 2012.

Lloyds insists it can repay most of this by shrinking its balance sheet, by reducing how much it lends and invests - which of course has the effect of reducing its borrowing requirement.

The big question, that matters to all of us, is whether it can shrink its balance sheet in this way without starving businesses and households of vital credit, without precipitating what I've called Credit Crunch 2.

You can keep up with the latest from business editor Robert Peston by visiting his blog on the BBC News website.

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