RBS may exit expensive government asset protection scheme early



RBS - A Long Way to Go

RBS – A Long Way to Go

Executives of Royal Bank of Scotland and UK Treasury officials are said to be in talks over the bank’s early exit from the expensive ‘Asset Protection Scheme’ – an insurance scheme devised to protect banks from possible loan defaults.

“Clearly there are talks going on, but it is very early days”, one person close to the developments said.

The insurance scheme was devised after the setting up of Asset Protection Agency (APA) in 2009 to protect bad or risky assets and currently holds RBS’s risky assets worth £280 billion ($445 billion). RBS pays an annual insurance premium of £700 million and has paid a total of £2.1 billion fees till date to avail the facility.

RBS CEO Stephen Hester had said before that the earliest exit would be 2012. Sources say that the insurance cover remains vital for the bank’s most risky ‘toxic’ assets.

However, many people have started to view the entire exercise as pointless. The argument put forward is that RBS will have to absorb the first £60 billion of losses (similar to an ‘excess’ of insurance) and the APA will not pay anything. 90 percent of further losses will be absorbed by the APA, while the remaining 10 percent will be borne by RBS.

The bank had previously estimated losses in the region of £57 billion. However, after selling off and winding down portfolios (On last count in September, the asset portfolio had shrunk to £205 billion), the net loss was revised between £51 and £53 billion, while the bank has suffered losses worth £31 billion till date.

An early exit will also boost market sentiment about the struggling bank and will help the government once it starts selling shares – possibly from 2012.

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