The Asset Protection Scheme (APS)

The APS, announced in January 2009, was created to enable the UK Government to provide participating institutions with protection against future credit losses on defined portfolios of assets in exchange for a fee.

By limiting potential losses in this way, the Government aimed to support the stability of the UK financial system; to increase confidence in the participating financial institutions; and to improve their capacity to lend to creditworthy businesses and individuals.

Two major British banking institutions - The Royal Bank of Scotland Group (RBS) and Lloyds Banking Group (LBG) - agreed in principle to participate in the APS in February and March 2009 respectively.

These initial agreements gave both banks implicit protection for their balance sheets, allowing them to begin the process of rebuilding and restructuring the healthier core of their businesses and to increase lending.

As announced at the time, final agreements with both banks were subject to:

HM Treasury undertaking thorough due diligence of the assets that RBS and LBG proposed to put into the APS
ensuring the terms were consistent with EU State aid requirements
rigorous stress-testing on both banks by the FSA

Following these steps, the Government announced in November 2009 the conclusion of the detailed negotiations with the Banks.

As a result of the confidence provided by the APS, and improved market conditions, LBG felt able to raise sufficient capital privately without the need for additional support from the APS. On exiting the APS, a fee of £2.5 billion was levied on LBG for the implicit protection it had received since indicating it would participate. RBS remained as the sole participant in the APS.

How the APS works

The APS operates like a conventional insurance policy. RBS pays an annual fee to participate in the APS (like the “premium” in a standard insurance policy), in return for which the Government insures the value of certain assets that RBS owns.

If those assets fall in value, RBS will absorb the first £60 billion of losses (like the “excess” in a standard insurance policy). Any losses beyond the first £60 billion will be shared by RBS and the Government at a ratio of 1:9 (i.e. RBS taking 10 percent of the loss and the government taking 90 percent).

Graph showing how APS works

Any payments made from the APS to RBS in respect of losses on assets included in the APS will be deferred for at least two years from the time that the loss occurs. This deferral period will allow the APA to audit the loss claims thoroughly and enable the maximisation of recoveries on the assets before payment is made.

Assets included in the APS

The table below shows the types of assets that are included in the APS (values as at 31st December 2008).

Table showing assets included in the APS

Fees payable to the taxpayer

LBG agreed to pay £2.5 billion to exit the APS in return for the implicit protection they had received since they initially indicated they would participate. For their participation in the APS, RBS has agreed fees of £700 million per year for the first three years of the APS, and £500 million per year thereafter.

The graph below shows fees to which HM Treasury is entitled in respect of the APS. (Please note that although the graph shows the period until 2014, the APS will actually last for the lifetime of the covered assets, or until RBS exit the APS in accordance with the APS Terms and Conditions.) To leave the APS, RBS must pay a minimum exit fee of £2.5 billion, less any APS fees already paid.

A more detailed explanation of the APS can be found on the HM Treasury website.

The Asset Protection Scheme (APS)

How the APS works

Assets included in the APS

Fees payable to the taxpayer

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