Further interventions: creating the Asset Protection Scheme
Following the bank recapitalisation programme of 2008 to bolster Lloyds Banking Group (LBG) and Royal Bank of Scotland (RBS), the previous Government announced a significant further measure in January 2009: the creation of the Asset Protection Scheme (APS). The APS allowed banks to pay a fee in return for protection of agreed portfolios of assets. RBS and LBG agreed in principle to participate in the Scheme.
Under the APS, the banks are liable for a portion of first losses, after which the Government bears 90% of losses. The intention was to provide a floor for bank losses, enabling participating banks to rebuild healthier businesses and improve confidence to revive lending.
For detailed information on the APS, the following material is available:
In addition, a new scheme to guarantee asset-backed securities was announced alongside the Asset Protection Scheme, as well as an Asset Purchase Facility (APF), to be administered by the Bank of England.
The Government introduced the Asset Purchase Facility to help increase the availability of corporate credit, and to provide a framework for the Monetary Policy Committee at the Bank of England to use asset purchases for monetary policy purposes. With the Bank Rate at historically low levels, the Treasury authorised the use of the APF on 3 March 2009. The APF formed the basis of the Bank’s quantitative easing programme.
This is where the Bank increased the quantity of money available by injecting money directly into the economy. It did this not by actually ‘printing money’, as is sometimes suggested, but through buying assets from private sector companies – e.g. insurance companies, pension funds, banks or non-financial firms – and crediting the seller’s bank account. The end result is that more money is made available to the wider economy.
Participation in the Asset Protection Scheme
By the autumn, market conditions were improving. Following extensive due diligence of the assets that Lloyds Banking Group proposed to put into the Asset Protection Scheme, and rigorous stress testing by the Financial Services Authority, LBG announced that it would not participate in the APS. It would instead pay a fee to the taxpayer for the implicit protection provided to date and raise additional capital. This reduced the risk facing the taxpayer. LBG (as well as RBS) was still required to meet strict conditions on pay and lending as a result of the support it received.
The previous Government and RBS signed full, legally-binding agreements in November 2009 – with a £60bn first loss scenario to be borne by RBS and a £282bn pool of insured assets. The Asset Protection Agency (APA) was launched in December 2009, to operate the APS on behalf of HM Treasury in such a way as to maximise the value of the assets protected by the APS.
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