The government has injected yet more capital into Britain’s banks and is underwriting £325 billion of toxic assets held by Royal Bank of Scotland (RBS), raising the spectre of
The asset protection scheme announced in January was designed to “reinforce the stability of the financial system, to increase confidence and capacity to lend, and in turn to support the recovery of the economy”.
Under it the government insures the company against credit losses on a portfolio of assets, with the institution retaining only 10% of the exposure to losses.
The initiative was brought in to underwrite the risk of transactions and get a price fixed for these assets in the market to facilitate trading. The longer-term aim is to build confidence in the banks’ balance sheets so that “normal” levels of lending can restart.
Michael Taylor, a senior economist at Lombard Street Research, says: “De facto, it is nationalisation, just as Northern Rock was de facto nationalised before it was formally taken over. This can already be seen over the scandal of Sir Fred Goodwin’s pension.”
RBS, which is 70% owned by the government, will pay a £6.5 billion fee for using the scheme as well as £5 billion in deferred tax credits. The government is itself injecting £13 billion to help the bank pay for its participation, with a commitment to supply a further £6 billion at RBS’s discretion.
The most recent cash injection is into B shares to prevent the government’s holding going above 75%, which would force it to bid for the remaining shares in the company.