HBOS’s aggressive corporate banking division was revealed to have been at the heart of the £10 billion shock loss announced by Lloyds Banking Group yesterday.

Lloyds Banking Group issued a warning that HBOS, the ailing bank it has taken over, made a whopping £7 billion of corporate losses last year after making bad bets on business lending.

Lloyds admitted that HBOS’s corporate division, which was run by Peter Cummings — the highest-paid executive at the bank — has had to write off £7 billion of bad loans, far more than HBOS’s management ever admitted. Mr Cummings is understood to have left in early January with a payoff thought to be about £660,000 and £6 million of pension entitlements.

The announcement leaves taxpayers facing billions of pounds of extra losses on their rescue of Lloyds and HBOS, while politicians are now warning that it is inevitable that the Lloyds Banking Group will need more government money to keep it afloat.

Vince Cable, the Liberal Democrat deputy leader, told The Times: “These figures confirm how big the problem is and it seems impossible to believe Lloyds can survive without further government funding.”

Taxpayers have already sunk £17 billion into the two banks.

After a lunchtime announcement that caught traders on the hop, Lloyds shares — the most widely held share in Britain with more than three million small investors — crashed 29.5p to 61.4p as the bank admitted that assets in HBOS were worth far less than it thought when it sought approval from shareholders for the controversial merger, brokered personally by Gordon Brown.

The Times estimates that taxpayers have lost more than £8.3 billion as a result of the Government’s investments in Lloyds TSB and HBOS.

Assuming that Britain has a population of 60 million, that equates to a paper loss of £143 for every man, woman and child in the country.

Last night on BBC’s Newsnight Alistair Darling, the Chancellor, defended both the Government’s role in pushing through the Lloyds takeover of HBOS last October without due diligence and the subsequent £17 billion taxpayer-funded bailout of the merged entity.

“The problem was that last October the banking system was facing imminent collapse,” he said. “We had no alternative but to intervene quickly.We had a matter of days and then hours to stop the entire banking system collapsing. Since then many other countries have done the same thing. The alternative was to let HBOS go down and last October [at such a critical point] the damage would not have stopped there.”

The timing of the profits warning was particularly embarrassing for Eric Daniels, the Lloyds chief executive, who did not mention the huge losses only three days ago when he appeared before the Treasury Select Committee.

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