HM Treasury

Newsroom & speeches

09 March 2009

Statement by the Financial Secretary to the Treasury, The Rt Hon Stephen Timms, MP, on Asset Protection Scheme and Lloyds

Mr Speaker, with permission, I would like to make a statement on the Asset Protection Scheme and the agreement in principle reached on Saturday between the Treasury and Lloyds Banking group.

The Chancellor is travelling to Brussels, ahead of the meeting of European Community finance ministers tomorrow, to discuss the G20 Finance Ministers meeting this weekend.  He has therefore asked me to make this statement.

The Asset Protection scheme was announced in January.  In his statement of 26th February, my Rt Hon Friend gave details of the participation by RBS Group, and he mentioned the negotiations underway with Lloyds.  The approach we adopted with Lloyds is similar to that with RBS.  Discussion involved a large amount of complex detail and it was important to take time to reach a satisfactory conclusion. 

An agreement in principle has now been reached which helps ensure financial stability, safeguards the interests of the taxpayer and supports the real economy by increasing lending.

Principles behind Asset Protection Scheme

Under the Asset Protection Scheme, the Government will provide protection against certain credit losses on particular assets in exchange for a fee.

A “first loss” – similar to the excess in insurance policies – remains with the institution.  Lloyds will meet all of this.  The protection provided by the Government will cover 90 per cent of the remaining loss.  The other 10 per cent will remain with the institutions as an incentive to manage the assets prudently.

The Government will accept applications to the scheme for other eligible institutions until 31 March.

Lloyds Specifics

Lloyds announced on Saturday, their intention to place £260 billion of assets in the scheme, on which they have already taken impairments of some £10 billion - and through the first loss mechanism they will retain a further exposure of £25 billion.  Any losses beyond this will be borne 90% by the Treasury and 10% by Lloyds.

The protection will cover a range of assets, including mortgages, unsecured personal loans, corporate and commercial loans and treasury assets.

Lloyds will pay a fee of £15.6 billion in new non-voting “B” shares.  These will count as Core Tier 1 capital.  The Treasury has also agreed to replace its existing £4 billion of preference shares.  Current shareholders will be able to purchase these ordinary shares as part of an open offer.

The Treasury will take up its pro-rata share of the open offer, so maintaining its minimum voting share at 43.5 per cent, and will subscribe for any additional shares not taken up by existing shareholders.

If no other shareholders take up their entitlements, the Treasury’s ownership of ordinary shares will increase to 65 per cent.  Taking into account “B” shares paid as a fee, its economic ownership will reach up to 77 per cent. 

Increasing Lending

As my Rt Hon friend set out, the Asset Protection Scheme is a key step to put banks on a stronger footing, insure their balance sheets and boost lending to businesses and individuals. 

As part of this deal, in return for access to the Asset Protection Scheme, Lloyds has agreed to increase its lending by an additional £14 billion over the next 12 months: £3 billion for homebuyers and £11 billion for business lending.  It has made a similar commitment for 2010.

Consistent with RBS, Lloyds will be required to present a detailed implementation plan to the government, and to report monthly on compliance with the lending agreements.

The Government will publish an annual report on these arrangements, which will be made available to Parliament. The agreements are binding and will be reflected in the performance related pay of bank staff involved. 

Another condition for Lloyds – as for any bank participating in the Scheme – is a requirement to develop a sustainable long-term remuneration policy.  This means reviewing policies and implementing new policies consistent with the FSA’s new code of remuneration practice. 

We have agreed that no discretionary bonuses will be paid in 2009 except to junior staff earning an average of £20,000, and that there will be no annual free share award at all.

Mr Speaker, at the heart of the current financial and economic problems around the world is a crisis of confidence about bank assets.  Lack of confidence is having profound effects on UK companies and individuals who are not able to secure business loans or mortgages.

The critical obstacle to expanding lending is uncertainty about the value of banks’ balance sheets.  So we are acting now to enable the banks to clean up their balance sheets, making them more able to lend to individuals and businesses.

Transformation will not happen overnight, but this is the essential starting point.  And it must go hand in hand with broader reform of banking supervision and regulation.

Action must be taken, not only here, but by governments across the world.  The alternative is a failure of the banking system, here and elsewhere, which would make the recession longer and more painful, and put more jobs at risk.  Getting the banks to lend again is essential to our economic recovery and to our fight against the global recession.

The Government is clear that British banks are best owned and managed commercially, and not by the Government. The future of the UK as a financial centre, and the future of our economy and thousands of jobs, depends on being able to run banks commercially.

All countries are having to deal with the same problem – how to isolate assets which are damaging confidence in the banking sector and preventing banks from lending more.  Over the coming weeks, we will continue to discuss with other countries, including the US and the European Union, how best to coordinate our approach to the common challenges we face.

As part of our presidency of the G20, the Chancellor recently wrote to finance ministers setting out a set of shared principles for dealing with asset protection and insurance.

Conclusion

It is essential to restore confidence in the banks, allow them to clean up and rebuild, and get lending going again.  The economic recovery and thousands of jobs depend on it.

I commend this statement to the House.

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