RBS to exit £100bn state insurance scheme

Royal Bank of Scotland this morning announced its exit from the £282bn state-backed insurance scheme set up when the bank was bailed out four years ago, reports The Telegraph.

RBS is set to make its final £1.4m payment to the Asset Protection Scheme (APS) this week, which will see it reach the £2.5bn minimum threshold to leave the emergency insurance programme.

The APS was set up by the authorities in January 2009 to provide insurance cover to RBS and Lloyds Banking Group after their taxpayer-funded rescues.

Lloyds left the scheme just months later, saying it did not need it and paying the £2.5bn minimum fee in November 2009.

The scheme originally provided RBS with cover against losses on toxic assets worth £282bn, but this has shrunk over the past four years to a figure of about £100bn as the bank has sold off businesses and loan portfolios no longer considered core to its operations.

Exiting the APS is seen as an important milestone on RBS’s path to reprivatisation that would enable the state to start selling its 82pc holding in the lender.

The removal of the APS will lead to a fall in RBS’s core Tier 1 capital ratio, the measure of the bank’s cash reserves, from 11.1pc to 10.3pc, though is still above the minimum required under the incoming Basel III rules.

Analysts at Shore Capital said the protection provided by the scheme was considered “unlikely to be required” and pointed out the bank was still selling down its toxic assets.
RBS had been spending £700m a year to pay for the APS, though as the £2.5bn threshold has got closer, its payments have become quarterly and in the past month daily so as to avoid the bank overpaying.

The Financial Services Authority has approved RBS’s decision to withdraw from the scheme tomorrow but the bank will continue to discuss its capital plans and preparations to meet Basel III demands with the regulator.

The Treasury has now received £5bn in fees from the APS and, with RBS leaving, the scheme will be wound down, enabling it to close the Asset Protection Agency, its unit responsible for running the scheme.

From now on, the Treasury’s main income source from RBS will be any dividend payments the bank makes. Since RBS was nationalised it has not paid any dividends and before it could restart shareholder pay-outs it would need to overcome several legal hurdles that prevent such payments.

The exit comes at a time when RBS is under increasing pressure over its strategy, with the collapse of a deal to sell 316 branches to Santander UK.

Santander had originally agreed to buy the high street branches more than two years ago, but last week informed RBS of its intention to withdraw from the deal because of the repeated delays that have hit it.

The branches are being sold as a condition of a state aid agreement with the European Commission following the bank’s bail-out in 2008. Under the terms of the deal, RBS must sell the branches by the end of next year.

No request has yet been made for an extension of this deadline, according to the EC, which also said it would not water down competition rules.