Lloyds Banking Group (NYSE: LYG) is making news these days. In a first in Europe this year, the bank is entering into a deal to market collateralized loan obligations valued at about $2.45 billion.

Made famous in the days leading up to the financial crisis, CLOs and derivatives like them are a form of securitization where payments from loans are pooled together and distributed in different tranches. In this case, Lloyds has offered a pool of loans that will fund private finance initiative projects of 57 entities. The move appears to be an attempt on the part of Lloyds to clean up its balance sheet as it sheds the direct holding of loans and ships them off to entities more willing and more able to take the risk of holding them for the long term.

As I have mentioned in one of my prior articles, Lloyds has still not fully recovered from the affliction of huge bad debts. This is part of a much larger strategy to right the ship.

Game plan in action
Lloyds aims to reduce its balance sheet by 200 billion pounds by 2014, and its new chief, Antonio Horta-Osorio, seems to be right on target. Under Horta-Osorio, the bank has already announced plans to sell off more than 600 branches to pare costs. Meanwhile, there has been some reshuffling in the group's management team as well. Helen Weir, head of the retail division, is leaving the company. All of these efforts, including the collateralization of these loans, will help Lloyds move closer toward its short- and long-term targets of financial normalcy.

With this weapon, Lloyds can aim higher
These CLO deals will help the beleaguered British bank reduce its loan liabilities and lending risks. This move would likely help Lloyds' cash reserve ratio and eventually put it in a better position to raise funds from the market. For Horta-Osorio, the task is clear-cut. Let's see how things work out. As Warren Buffett famously said, derivatives are financial weapons of mass destruction. A shakedown in the market for collateralized loan obligations in 2007 led to some uncomfortable moments for U.S. banks, though JPMorgan (NYSE: JPM), Citigroup (NYSE: C), and Bank of America (NYSE: BAC), among others, stepped back into the game in 2009. Let's see if Lloyds can handle them properly. Add Lloyds to your watchlist for further Foolish coverage and tracking. 

Fool contributor Zeeshan Siddique does not own any of the stocks mentioned in the article. The Fool owns shares of Bank of America and JPMorgan Chase. Through a separate Rising Star portfolio, the Fool is also short Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.