HM Treasury: The Asset Protection Scheme - Public Accounts Committee Contents

2  Protecting the taxpayer

8.  The Treasury put considerable effort into assessing the overall pricing structure of the Scheme, but there were gaps in its analysis of the minimum fee to be paid by RBS. Under the final agreement with RBS, the Treasury agreed that: RBS bears the first £60 billion of losses (termed the "first loss"); the Treasury meets 90% of losses incurred thereafter (termed the "second loss"); and RBS will pay annual fees subject to an overall minimum fee on exit of £2.5 billion or, if higher, 10% of the capital relief provided by the Scheme. The National Audit Office concluded that the Treasury analysis underpinning the minimum exit fee had lacked the breadth and depth of analysis it might normally have expected.[9]

9.  The Treasury accepted that it could have performed more analysis to underpin its decision on the fee. The fee had been the last thing to be agreed with RBS after the effect of other parts of the Scheme on the bank's capital, such as the level of losses to be borne by RBS, had been considered. The Treasury judged that, even with more extensive analysis, it would have set the minimum fee at £2.5 billion. The critical driver for its decision had been to charge the maximum fee possible consistent with securing financial stability and maintaining an incentive on RBS to exit the Scheme as quickly as possible.[10]

10.  Before finalising the Scheme, the Treasury considered whether an alternative of a larger capital injection might be better value for money. Although there might have been a saving of £4 billion under a stressed economic scenario if the Scheme had been replaced by a larger capital injection, the Treasury rejected this option. The Treasury was concerned that, without the Scheme, further injections of capital by the taxpayer into RBS would put the bank at even greater risk of being perceived as nationalised. It also saw advantage in having the Scheme in place in case it was needed by other banks. As market conditions improved during 2009, the alternative of a contingent capital injection became a possibility but this had occurred fairly late in the development of the Scheme and would have taken time to implement. The Treasury was concerned that any further delay to finalisation of the Scheme might have been misinterpreted by the financial markets as an indication that problems at RBS were worse than expected.[11]

11.  If the first loss is exceeded, RBS will have less financial incentive to stem further losses and the taxpayers' position would be particularly vulnerable if losses were to exceed about £73 billion. By September 2010 losses stood at £37 billion, against an expected total of £57 billion, over the life of the Scheme.[12] So far, losses have remained below the first loss of £60 billion, beyond which the Treasury would be liable to make payments to RBS. The Treasury thought that losses of £73 billion would only be reached in extreme circumstances. [13]

12.  Analysis conducted by the Asset Protection Agency, set up by the Treasury to oversee the Scheme, suggests these extreme circumstances would have to involve, for instance, default rates on loans and other assets held by banks similar to those seen in the Great Depression. If such a downturn did occur, the Treasury envisaged the need for much larger interventions across all banks rather than just the need to consider issues surrounding RBS staying in the Scheme. The Treasury's assumption was that RBS, based on current performance, would consider it financially worthwhile to exit the Scheme in 2012. RBS has confirmed that it is hoping to exit the Scheme in 2012-13, subject to regulatory approval. [14]

13.  Over the past three years, the Treasury has accumulated much knowledge and practical experience of dealing with banks in difficulty. From 2007, when Northern Rock had to be supported, the Treasury had to handle interventions in private sector businesses of a type and scale that it had never faced before. At its peak, the Treasury had around 100 people working on the development of the Scheme. Although staff numbers had reduced considerably following implementation of the Scheme and the establishment of the Asset Protection Agency, the Treasury had retained expertise to oversee the legislation needed to make changes in the regulatory system. As the Bank of England will now take the lead in resolving banks in difficulty, the Treasury recognised it needed to retain the experience and ability to ask difficult questions of the regulator and protect the taxpayer.[15]

9   C&AG's Report, para 10, 16 Back

10   Qq 74-77, 83; C&AG's Report, para 15, recommendation (a) Back

11   Qq 5-7; C&AG's Report, para 6 and Appendix 3, paras 21-22 Back

12   Subsequent to the hearing, the Asset Protection Agency published a lower figure for the expected loss of £51 billion (Interim Report for the period 1 July 2010 to 31 December 2010, February 2011) Back

13   Q 93; C&AG's Report, paras 12 and 13 Back

14   Qq 93-95, The Royal Bank of Scotland Group Annual Review and Summary Financial Statement 2010, page 41 Back

15   Qq 1, 99, 100; C&AG's Report, recommendation (c) Back

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Prepared 20 April 2011