Alistair Darling is set to drop the £480m annual interest bill charged to Lloyds Banking Group on a taxpayer loan in exchange for a promise by the bank to provide billions of pounds in extra mortgage funding and loans to small businesses.

The chancellor is prepared to convert £4bn of government preference shares – which carry a 12% coupon – to ease financial pressures on Lloyds and as part of a wider deal to boost lending in the economy.

Although talks are continuing this week, the preferred shares are expected to be converted into other forms of non-voting equity, to prevent the government’s 43% stake in the bank rising above 50%.

Financial Times