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Frequently asked questions

What is the Asset Protection Scheme?

The Asset Protection Scheme (APS) is a scheme that provides protection for UK banks against exposure to future losses on certain risky assets. It was announced by the Government in January this year, when the world’s financial system was facing a worsening crisis of confidence about the value of bank assets and the potential losses associated with these. As a result, banks were holding onto their capital rather than using it to provide loans and mortgages. The APS is part of a broader package of Government actions that were introduced to stabilise the financial system, increase confidence and capacity to lend among the banks, and support the recovery of the economy.

More information about other elements of the package can be found on the HM Treasury website.

Royal Bank of Scotland (RBS) and Lloyds Banking Group (Lloyds) announced their intention to participate in the APS in February and March respectively.

Why has Lloyds now decided not to participate in the APS?

Market conditions have improved since Lloyd’s announced its intention to take part in the Scheme in March, and the implied protection provided by the APS in the interim has helped to restore confidence in Lloyds. As a result, Lloyds can now raise sufficient private sector capital to meet the requirements of the Financial Services Authority (FSA), the UK financial services regulator, without the need for additional support from the APS.

This outcome represents better value for money for taxpayers, as the private sector will now provide the majority of the capital Lloyds requires.  Lloyds will also pay the Government a cash fee of £2.5bn in return for the implicit protection already provided since the announcement in March.

What about RBS – why have the terms of its participation changed?

The revised terms of participation agreed with RBS reflect a number of factors. As we said in February, the initial agreements would be subject to thorough due diligence of the assets to be covered, and rigorous stress-testing by the FSA. We also needed to make sure the terms of the agreements were consistent with EU requirements in relation to State Aid.

We now have greater clarity about the scale and timing of the bank’s likely losses, and the impact these could have on RBS. In addition, since announcing its intention to be part of the APS, RBS, like Lloyds, has benefited from implicit protection, allowing it to begin the process of rebuilding and restructuring the healthier core of its businesses.

These new terms provide a better deal for the taxpayer – the value of assets covered is lower, the ‘first loss’ (the proportion of the loss payable by RBS) has increased and an annual fee (rather than an upfront fee) will be paid by RBS, giving the bank an incentive to leave the Scheme as things improve.

Why is this good for the taxpayer?

The Government’s decisive intervention in the financial sector, including the APS, has protected the savings and jobs of many thousands of families and individuals.  The arrangements announced on the APS give taxpayers the best possible deal in return for funding to stabilise the banks. Both the likely costs to the taxpayer and the risks faced by the public finances are markedly lower, compared to the initial announcements earlier this year. For example:

Why is this good for consumers?

As part of the APS arrangements, the Government has agreed restructuring plans for RBS and Lloyds that include the sale of bank branches and other businesses to small or new players in the banking sector. These restructurings will facilitate competition in the UK banking market, which is good for consumers.  In a more competitive environment, consumers benefit from greater choice, better value for money and improved products.

The divestments from each bank together represent nearly 10% of the UK retail banking market. These sales, together with the planned future sale of Northern Rock, will have the potential to create three new banks on the high street within five years.

In addition lending commitments made earlier in the year remain in place, in full. In return for the taxpayer support provided both RBS and Lloyds have agreed:

What has the Government done to make sure RBS and Lloyds don’t continue to pay excessive bonuses?

We have been very clear that there must be an end to the short-term bonus culture in the banking sector. In return for the taxpayer support provided, both RBS and Lloyds have agreed that:

This is on top of the banks’ existing commitments to meet the FSA Remuneration Code, the G20 pay principles, and any new measures the Government introduces from the Walker Review.

The commitments made by RBS and Lloyds go further than the rest of the UK banks, which have also signed up to the FSA Remuneration Code and the G20 pay principles.

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