Royal Bank of Scotland has been forced to appoint external advisers to settle disputes overs loans insured by the asset protection scheme, it emerged today, as the UK body set up to insure the toxic assets at the heart of the credit crunch reiterated that the taxpayer should make a £5bn profit from protecting banks’ problem loans.
The Asset Protection Agency (APA) has the powers to force RBS, which is 84%-owned by the taxpayer, to appoint external advisers when the two bodies cannot agree on how to handle a particular toxic asset, and has now done so in a “handful” of cases. The agency also said it had “expressed concern” over the quality of the credit memos and financial analysis it was receiving from RBS with regard to the insured loans, which were originally valued at £282bn.
RBS admitted there had been some breaches of the rules and had trained more than 3,000 staff to deal with the complexities of the scheme.
Despite his optimism over the possibility of future profits from the APS, Stephan Wilcke, the APA chief executive, warned that the pool of assets insured by the taxpayer remains “vulnerable due to high leverage and significant refinancing risks” as he unveiled the APA’s first annual report since its creation in November 2009.
“The acuteness of the global banking crisis may have abated somewhat, and we are nearer to our goals then we were in 2009. Still, the recovery is extremely fragile, and the recent travails of the eurozone and its banks serve as a salutary reminder that it would be too early to declare our task over,” Wilcke said.
RBS has to shoulder the first £60bn of losses on the assets originally insured by the APA. The agency believes that there is a chance that the state-controlled bank could exceed that so-called “first loss” between the first quarter of 2012 and the first quarter of 2015. Even so, any breach will be temporary and should not affect the taxpayer making a profit on the scheme as RBS will have to pay a fee for breaching the first loss threshold.
RBS is expected to look for ways to exit the asset protection scheme by the end of 2012, by which time the debt problem that forced the government into bailing out the banks should be under control. By the end of March, RBS had eaten into £30.5bn of the first loss, which may suggest that the bank has a similar amount of impairment charges to incur in the coming two years.
The APA reckons that the actual loss is likely to be £57bn and points out that it only remains “economically attractive” for RBS to remain in the asset protection scheme if losses exceed £60bn.
The bank confirmed it still hoped to exit the APS by the end of 2012 or 2013. “Given ongoing economic uncertainties, we believe the APS offers valuable protection to RBS Group against the consequences of a severe deterioration in macroeconomic conditions and market confidence,” an RBS spokesman said.
The APA has tried to assess the chance of the Treasury suffering an ultimate net loss from the APS and believes it would be in the region of 1 in 10 to 1 in 20. “This would only occur if credit losses on the APS pool exceeded approximately £75bn in a severe stress scenario,” the agency said.
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