Royal Bank of Scotland Reaches Milestone in Recovery Plan

By | October 17, 2012

Royal Bank of Scotland is set to withdraw this week from an insurance scheme set up by Britain during the banking crisis to cover its riskiest loans, having paid the minimum required in premiums, sources familiar with the situation said on Tuesday.

The bank’s payments into the Asset Protection Scheme (APS) are expected to have reached the 2.5 billion pound ($4 billion) mark on Thursday, enabling it to ask Britain’s Finance Ministry and financial regulator for permission to opt out, thereby saving it 500 million pounds a year in future premiums.

The Treasury and Financial Services Authority are not expected to stand in the bank’s way, one of the sources said.

Exiting the APS would mark a significant milestone in the recovery of RBS and help clear the way for an eventual sale of the government’s 82 percent stake.

Britain pumped in 45 billion pounds to rescue RBS during the 2008 financial crisis and UK taxpayers are currently sitting on a loss of over 20 billion pounds.

The APS capped potential losses on 282 billion pounds of RBS’s most toxic assets following the bailout. RBS, which hasn’t made a claim through the scheme, has since shed most of those assets and Hester recently said the APS was now “essentially worthless” in terms of providing cover.

Britain’s Asset Protection Agency (APA), which was set up in 2009 to administer the scheme, said in July that its estimate of potential losses from risky RBS loans had fallen to 39 billion pounds from 45 billion the year before.

It said the scheme now covered assets worth 121 billion pounds, far lower than the 286 billion covered in 2009.

The APA also said that the British government was on track to pocket an overall 5 billion pound profit from the scheme, which Lloyds paid 2.5 billion pounds to avoid entering, leaving RBS as the only participant.

RBS was required to pay a minimum of 2.5 billion pounds before being able to ask to leave. The fees are paid on a daily basis and the bank is due to make its final payment on Thursday.

Leaving the APS will be a much-needed boost for the bank, which suffered a major blow last week when its 1.65 billion-pound deal to sell 316 bank branches to Spain’s Santander collapsed. RBS is obliged by the European Union competition authorities to sell the branches by the end of next year as part of the price for receiving state aid.

The bank is also under investigation by the U.S. and UK authorities over the Libor interest rate-rigging scandal and possible breaches of U.S. economic sanctions against Iran.

Those issues are threatening to overshadow the turnaround driven by Hester, who has overseen a 700 billion-pound reduction in RBS’s balance sheet to bolster its financial strength and cut back on risk.

Earlier this month Hester said RBS should have largely completed its restructuring by the end of 2013 but had “about 15 months of heavy lifting still to do”.

Speaking after a Thomson Reuters event on Tuesday, UK financial services minister Greg Clark declined to comment on when RBS will leave the asset protection scheme. Martin Wheatley, head of the FSA, also declined to comment at the same event.

Was this article valuable?

Here are more articles you may enjoy.