Lloyds cannot act without approval form the FSA
Lloyds Banking Group has said it is in talks with the government to alter its use of a scheme to insure its riskiest assets against further losses.
It planned to put £260bn of loans and investments into the Government Asset Protection Scheme (GAPS) in return for taxpayers taking a larger Lloyds stake.
But now Lloyds is reconsidering, citing economic improvements and its loans doing less badly than thought.
Most observers say some participation in the APS will still be needed.
Lloyds said a further announcement on its stance would be made "as soon as practicable".
"All possibilities remain open," it added, saying options included finding an alternative to entering theGAPS and "possible changes to the commercial terms" in which it entered the scheme.
Lloyds cannot act without the agreement of the Financial Services Authority (FSA) and UK Financial Investments, which looks after taxpayers' interest in Lloyds - which currently stand at 43%.
Reports that the FSA had told Lloyds that it could not leave the scheme were wrong, said BBC business Editor Robert Peston.
But he added Lloyds had been told it would need to strengthen its balance sheet by "well over £20bn" if it were to withdraw from the GAPS - which is about $5bn more than the bank had expected.
And the capital needed to do that was "rather more than Lloyds would be able to raise in current market conditions", our business editor said.
"Raising more than $20bn is a tall order for a bank whose total market value is only £30bn."
The scheme (previously known as APS) was created when the struggling Lloyds, along with Royal Bank of Scotland - were unable to raise the capital to build up their a buffer of reserves.
Rather than the government increasing their stakes in the banks, it looked for an alternative way of protecting the banks and their depositors from losses they incurred on bad loans and investments.
Under GAPS, the government insures, for a price, some of the expected future losses on past investments made by our banks.
If those losses crystallised, some of them would in effect be transferred to the taxpayer.
However, if they did not, the taxpayer might make a profit on the premiums that the government will have charged.
One reason Lloyds is keen to minimise its use of GAPS is that it feels the fee it is charged by the Treasury is too expensive.
Also, because the scheme essentially constitutes state aid, getting out of it will reduce the amount of power which European competition regulators have to make it sell off parts of its business.