Lloyds Banking Group will repay about £2.56 billion to the Government, setting the ball rolling as banks around the world make moves to pay back emergency bailouts made during the credit crisis.

Lloyds confirmed today it would repay the cash after it raised £4.3 billion by selling new shares, becoming the first bank to repay some of the Government’s £37 billion bailout of the UK bank sector. The early repayment will help to justify the billions of pounds of taxpayers’ money pumped into the banks in the past year.

The repayment is being made far sooner than either the City or the Government could have expected, just eight months after the Treasury had to bail out Lloyds following its controversial takeover of HBOS, its struggling rival.

Sir Victor, speaking to Bloomberg said: “We’ve got a major merger that’s beginning to show results.”

"We’re only about 130 days into it, but it will be fine," he said. "We’ve got the program with the government which will insure us against the very worst of the loans, should there be a further downturn.”

The Lloyds move came after US banks Morgan Stanley, JPMorgan Chase and American Express said in the last week they would sell shares as they position to repay billions of dollars borrowed under the US Treasury’s Troubled Asset Relief Program.

In a sign of growing confidence, US regulators are expected on Wednesday to name those banks allowed to repay massive bailouts handed out at the height of the financial crisis.

But reflecting the scale of the problems still besetting a battered global banking system, the Swiss government showed no sign of selling out of UBS when a lockup period for converting its notes into shares ends next week.

Indeed, even the money Lloyds will pay back represents less than one sixth of the £17 billion into the bank by the Government and one fourteenth of the total doled out in the bailout of some of Britain’s leading banks unveiled last October.

And while the repayment will loosen the government’s grip on Lloyds in terms of limiting its ability to pay dividends, the state’s stake is still set to rise still further this year.

Shares in Lloyds fell 5.1p or 7.7 per cent, to 61.10p.

“It may have a long climb out of the hole its dug itself into, but Lloyds is making small steps in the right direction,” said Manoj Ladwa, senior trader at ETX Capital.“

Lloyds said shareholders holding 87 per cent of the bank had accepted an offer to buy new shares at 38.43p each, a steep discount to Friday’s closing price of 66.2p.

The remaining unallocated shares or rump were sold at 60p, raising a further £819 million towards buying back £4 billion worth of preference shares from the government.

Proceeds above the £4 billion target will be returned to shareholders who abstained from the share offer.

Lloyds confirmed the Government’s stake was unchanged at 43.4 per cent because it paid £1.74 billion to subscribe to the share issue.

That cost of the new shares means the net repayment to the Government will be £2.26 billion from shareholders plus a further £300 million Lloyds will fund from existing resources.

Britain’s stake in Lloyds will rise to about 62 per cent, however, assuming it finalises a plan to insure £260 billion of risky assets under the Government’s asset protection scheme.

In return for signing up to the scheme Lloyds will have to pay the Government a premium of £15.6 billion in new shares and absorb the first £25 billion in any losses.

Lloyds sees clear advantages to buying back the preference shares from the Government, however, saying it expects a boost to its capital strength.

It will also remove the need to pay the government £480 million a year in dividends and clear the way for Lloyds to begin paying dividends to ordinary shareholders “as market conditions and the financial position of the group permit”.

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