Treasurer Alistair Daring has introduced a taxpayer-backed scheme to insure banks’ riskier assets from further loss.

The scheme hopes to help clean up banks’ balance sheets and also aims to encourage more lending, as well as restore public confidence in the banking sector.

The RBS has already signed up to the scheme and has said it will put in £325billion of toxic assets, and Lloyds has also admitted a willingness to join the scheme.

Broken Banks – Broken Economy

Mr Darling has said: “We want to rebuild confidence and provide certainty to enable banks to maintain and extend their lending.

“If we don’t fix the banks, we won’t fix the economy,” he added.

George Osborne, the shadow chancellor, has said that other government schemes hadn’t worked yet, and wants the public to know how much of taxpayers’ money will be put into the scheme.

He said: “British taxpayers are insuring the car after it has crashed.”

All banks that sign up to the Asset Protection Scheme, it will bear an initial loss on its protected assets, but the government will be paying the remaining losses.

However, the banks will also pay participation fees and enter into a legally binding agreement that aims to increase the amount of lending they provide to homeowners and businesses alike.

Taxpayers May Become Liable to £billions of Bad Loans

The scheme also means that taxpayers may become liable for £500 billion of bad loans and investments.

The RBS has already agreed to pay the participation fee of £6.5 billion to get into the scheme and has pledged to lend another £25 billion to the plan this year - £9 billion of mortgage lending, and £16 billion of business lending.

According to the agreement, the RBS will therefore be liable only for the first £19.5 billion of its losses.

In reward for this, the Treasury have announced it will inject £13 billion of capital into the bank, along with the £20 billion already promised. It will also make an extra £6 billion available if the RBS ever need more capital.

Government Could Gain Controlling Interest in RBS

All this extra funding could take the government’s stake in RBS up to 80%.

According to Mr Darling: “we will have shortly 70% of the voting shares, in other words we have a controlling interest. In terms of the economic interest, what is the taxpayer interest, the figure goes up to just over 80%, so we do have a significant holding in this bank.”

The details of Lloyds terms are expected out later today.

All British retail banks with more than £25 billion in eligible assets hae until 31st March to join the scheme which will remain running for at least 5 years.

Investors are welcoming the scheme, especially as the terms are more favourable than were initially expected.

What Do You Think?

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