The deal has been struck up in an attempt to boost consumer confidence in the bank and to encourage the group to lend.

In addition to an increased Government share in the group, up from 43 per cent, the arrangement will see the taxpayer insure £260billion in toxic debts, as it participates in the Asset Protection Scheme.

The Treasury scheme has so far agreed to insure £325billion of toxic assets from Royal Bank of Scotland, bringing the total amount insured to almost £600billion. Lloyds Banking Group predicts that 83 per cent of the toxic assets to be insured will come from HBOS, which it bailed out earlier this year.

In return for its participation in the scheme, Lloyds has agreed a fee of £15.6billion. The bank has also pledged to increase its lending by £28billion over the next two years.

The announcement mirrors the agreement with RBS, which has agreed to increase lending by £25billion. Lloyds will boost its mortgage lending by £3billion and its business lending by £11billion this year, with a further £14billion pledged for 2010.

Commenting on Lloyds’ participation in the scheme, group chief executive Eric Daniels said: “Participating in the Government’s Asset Protection Scheme substantially reduces the risk profile of the Group’s balance sheet.

“Our significantly enhanced capital position will ensure that the Group can weather the severest economic downturns and emerge strongly when the economy recovers. We believe that this is an appropriate deal for our shareholders.”

The measures have been met with criticism from shadow chancellor George Osborne, who said: “For the size of the British economy we have now spent more than any other country on bailing out our banks and there’s precious little to show for it. The taxpayer deserves better.”

The FTSE 100 fell this morning upon the weekend’s news, commenting Joshua Raymond, market strategist at City Index said: “Lloyds will remain in focus for sometime. It is not full nationalisation yet but investors fear the government are merely moving their chess pieces into position.”

© Fair Investment Company Ltd