HM Treasury

Newsroom & speeches

26 February 2009

Asset Protection Scheme

Check against delivery

Mr Speaker, with permission, I want to make a statement on the bank Asset Protection Scheme and today’s agreement with the RBS group.

The House will understand that it was necessary for the Treasury and RBS to issue market notices this morning.

In my statement to the House last month, I set out the principles behind the Government’s proposals to put the banks on a stronger footing, insure their balance sheets, and boost bank lending.

I can now tell the House that these measures are being implemented:

  1. At the end of January, the Bank of England temporary Special Liquidity Scheme was replaced with a permanent facility; 
  2. Last week the Bank of England began purchasing assets to free up markets for commercial lending; 
  3. And on Monday, Northern Rock announced they would provide up to £14bn of new mortgage lending.

Mr Speaker, banks are at the core of all modern economies – they allow people and companies to make payments, and to save and invest for the future.

Indeed, if we and other countries don’t fix the banking system we won’t fix the rest of the economy.

The basic problem we are facing is a crisis of confidence about bank assets –which is preventing the UK banking system from providing loans for businesses, and mortgages for those who want to buy a home.

And the critical barrier to improving confidence and expanding lending is the uncertainty about the value of banks’ balance sheets.

We must now enable the banks to clean up their balance sheets, so that they can become stronger and rebuild for the future, making them more able to lend to people and business all over the country.

This will not happen overnight but it is the essential starting point.

This must go hand in hand with a broader reform of supervision and regulation of the banking sector.

And this action must be taken, not only here, but by governments right across the world.

Because the alternative is a failure of the banking system, here and elsewhere, which will make the recession longer and more painful, putting more jobs at risk.

But Mr Speaker, the challenge today is to provide certainty against a background of a sharply deteriorating global economy.

The IMF, who in October were forecasting world growth this year of 3 per cent, are now forecasting growth this year of close to zero.

In the last quarter of last year, the world economy shrank for the first time since 1945 – with Japan, America, Germany, Europe, and the UK all now in recession.

All this followed from the sudden collapse in confidence when Lehman Brothers – the world’s fourth biggest investment bank – went bankrupt in the autumn.

This has meant even weaker banks, which are lending less and, in turn, are leading to further economic weakness.

So getting the banks to lend again is essential to our economic recovery and our fight against the global financial recession.

Mr Speaker, in October, we injected additional capital into the banking system, preventing the collapse of the banks, and maintaining their ability to lend to companies and to homebuyers.

We had to act quickly, in a matter of hours, not months.

We made available up to £50bn initially, of which £37bn was taken up then.

I have always said that we stand ready to do whatever it takes to maintain financial stability.

So, as well as additional contingent capital, today I am making a further allocation of £13bn for RBS in return for non-voting shares.

These shares will be purchased at a similar price to those purchased in October, and they in turn will pay a preference coupon.

Mr Speaker, the Government is currently set to own up to 70 per cent of RBS, for which the taxpayer will benefit when the bank recovers and strengthens in value.

We believe it is important that there remains some private ownership in RBS – by pension funds and individual investors for example.

So we have therefore decided that in injecting this capital, we will do so by purchasing non-voting shares, in line with practice in other countries. This means that the

Government could now own up to 84 per cent of RBS in economic terms, but the institution will remain as a privately quoted company.

This will provide potential gains in the long-term for the taxpayer and an easier return to full commercial ownership when the shares are sold and the proceeds come back to the taxpayer.

Mr Speaker, in January we announced the creation of a scheme to identify losses and clean up the banks’ balance sheets – giving them the confidence to lend again.

A range of different mechanisms have been suggested to do this, but in the end they all require the same basic approach.

First, a thorough analysis of the banks’ balance sheets, to establish what their assets and loans are worth, and whether they are likely to be fully repaid.

Second, a comprehensive stress test of whether the banks are strong enough to survive bad economic scenarios and establish what further losses the banks can bear – to satisfy us that the banks have enough capital to get through the recession and keep lending going.

Third, this enables the Government to judge the necessary scale of its intervention – either by buying up the assets or insuring them – in return for a fee or a share of future gains.

This is the approach that we will follow in the Asset Protection Scheme that I announced in January.

And in arriving at the design of the scheme, we have taken into account the experience of other countries, who in recent months have announced similar action – including the

Swiss with UBS, the Dutch with ING and the US with Citigroup and Bank of America.

Mr Speaker, this scheme is open to all eligible banks and building societies, and I expect a number of them to apply to use it according to this approach.

Lloyds Banking Group has today confirmed that it is in discussions with the Treasury regarding participation in the scheme.

In relation to RBS, who have announced their results today, let me set out how the Asset Protection Scheme will be applied.

When the Government purchased its stake in December, a new management team was put in place.

They have been going through the books, identifying potential losses.

As the House will understand this is not something that can be done quickly, because these assets are both complex and numerous.

As we have seen only recently in the case of the US, the valuation of these balance sheets takes considerable time.

And all the more so if done against a background of sharply deteriorating global conditions.

Mr Speaker, today the Chief Executive of RBS has announced a plan to restructure and rebuild the bank – including an agreement to extend their lending in the UK.

To complement this, RBS will include £325bn of assets in the Asset Protection Scheme.

This will include a range of assets, in the UK and abroad, most of them including mortgages and business loans that are currently hard to value.

The Treasury, with the help of external advisers, has assessed the assets held by RBS, subjected their balance sheet to a series of different stress tests, overseen by the FSA and the Bank of England - a practice which the US government has yesterday announced that it will apply to institutions seeking support.

To protect the taxpayer, RBS will have to bear the first portion of any additional losses over the coming years – up to a total first loss of 6 per cent or some £20bn, on top of the £22bn of impairment and write-downs they have already taken.

As in any insurance scheme, RBS will have to bear the first losses.

After that, the Government will cover up to 90 per cent of any further losses.

RBS will also pay a fee of 2 per cent of the value of the assets insured – some £6.5bn – again as in any insurance scheme.

They have also agreed for a number of years not to claim certain UK tax losses and allowances, meaning that when they do return to profitability, they will not be able to benefit from the losses accrued in the intervening period.

Mr Speaker, in return for this, RBS have agreed to maintain and increase their lending for mortgages and businesses.

In 2009 by an additional £25bn, with a further £25bn in 2010, depending on market conditions.

This is at the heart of the deal we are striking with RBS.

This new lending will be on top of maintaining lending on mortgages and other loans of just under £300bn in the UK. These lending commitments with be legally enforceable, externally audited, and the Treasury will report annually on RBS’s delivery of their lending agreement.

RBS have agreed to continue treating their customers fairly, including by participating in the Government’s Homeowner Mortgage Support Scheme.

This will go hand-in-hand with the tough conditions on RBS bonuses that we announced last week.

Together, these measures will help restructure and rebuild RBS – making one of the UK’s biggest banks also a stronger bank, better able to serve the people and businesses of this country – returning to tried and tested principles of banking.

Mr Speaker, other participating banks that join the scheme will have to agree to make more lending available.

And banks will also have to review their policies on pay and bonuses, to come up with long-term strategies that prevent excessive risk-taking and reward success, in line with the FSA’s new Code of Remuneration Practice.

Mr Speaker, as with previous measures, the capital support for the banks is an investment, which will eventually be sold – to the benefit of taxpayers.

With the insurance scheme, the eventual cost to the taxpayer over the lifetime of the scheme will depend on economic conditions and how assets are managed.

That means taking that risk onto the taxpayer, for a fee, but in a way that ensures the banks remain able to lend.

This strategy, tackling the bad assets, has worked elsewhere in the past.

So while the taxpayer does face risks as a result, the cost of doing nothing is far greater.

And in the long-term, the taxpayer will benefit from returning our stake in these banks to full commercial operation.

Because, as I have said before, I am 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.

Mr Speaker, 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 administration and the European Union, how best to coordinate our approach to the common challenges we face.

As part of our presidency of the G20, I have today written to finance ministers setting out a set of shared principles for dealing with asset protection and insurance.

Mr Speaker, 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.

And I commend this statement to the House.


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