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January 20, 2011 9:03 pm
Executives at Royal Bank of Scotland and officials at the Treasury are examining ways in which the part-nationalised bank could secure an early exit from the costly Asset Protection Scheme – an insurance structure designed to provide a government backstop for an original portfolio of £280bn ($445bn) of bad or risky assets.
Two people involved in the discussions said it was likely that the bank would leave the scheme by the end of this year.
Until now Stephen Hester, RBS’s chief executive, has maintained that 2012 was the earliest possible exit date.
The APS, for which RBS pays a £700m-a-year insurance premium, was designed to run indefinitely with a minimum cumulative charge of £2.5bn. This month the bank paid its latest instalment, bringing the total cost so far to £2.1bn.
That makes the end of this year a key cut-off. Stop then and the bank has to pay out a further £400m to top up the cumulative total to the £2.5bn minimum. Stay in the scheme, and even though the premium rate falls to £500m, Mr Hester would still be shelling out an extra £100m.
The big argument for pulling out is that the scheme is widely believed to be economically pointless for RBS.
As the bank would have had to absorb the first £60bn of any losses on the assets insured by the scheme (similar to an excess on an insurance policy), the APS was always unlikely to pay out.
Previous projections concluded that net losses on the insured portfolio would peak at £57bn. But as assets have been sold or wound down, the total portfolio has shrunk – to £205bn at the last count (in September). With it so has the projected total net loss, now somewhere in the £51bn to £53bn range, according to bankers, against losses of £31bn so far.
Simon Maughan, an analyst at MF Global, says the scheme was needed to reassure the markets at the time it was conceived, but its terms were always artificial.
“It was all about optics – you were protecting the bank, but with the high excess, in reality you were protecting the taxpayer from ever having to pay out, too,” he says.
Bankers have long acknowledged that the scheme – which Lloyds paid £2.5bn just to escape from – was, in part at least, a fine imposed by the government for having to be bailed out.
But if the APS structure had little commercial logic at the outset, it has none now – even for the government. That is because while the risks and size of the insured portfolio are diminishing, there are still plenty of risks within RBS as a whole. Much of the bank’s exposure to Ireland, for example, is outside the scheme. In other words, a potential additional bail-out of the whole bank could well come before an APS pay-out.
Another motivation for withdrawal is the potential confidence boost it would deliver RBS, which is key for the government once it seriously embarks on the task of selling down its 70 per cent shareholding, possibly from next year.
“RBS would have far cleaner growth prospects if it is out of the APS,” said Mr Maughan.
People involved in the discussions said one idea under consideration was to hive off the APS portfolio into a separately capitalised entity, in effect a “bad bank”, with a government guarantee.
But bankers say that to burnish RBS’s appeal to new investors any restructuring would probably also need to include the bank’s broader portfolio of “non-core” assets that are earmarked for sale or rundown.
Of that non-core portfolio – forecast to have shrunk to £143bn by end-2010 – more than 40 per cent does not fall within the APS.
But the cost of hiving off one or both portfolios could be high. “They might want help to separate out [non-core and APS] assets completely,” said one banker. “But I would expect the government would want to extract a fair price for that.”
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