Central Finance and Treasury

HM Treasury: The Asset Protection Scheme

The Treasury’s Asset Protection Scheme to protect over £280 billion of Royal Bank of Scotland’s financial assets against losses had a beneficial impact on financial markets. But the Scheme has, so far, only been partially successful in encouraging lending to creditworthy borrowers on the scale originally envisaged.

"The Asset Protection Scheme has helped the Treasury achieve its primary aim of maintaining financial stability and preventing the huge economic and social cost of the failure of a major UK bank. However, there has been only partial success in one of the Scheme’s subsidiary goals, encouraging bank lending in the UK."

Amyas Morse, head of the National Audit Office, 21 December 2010


The Treasury’s Asset Protection Scheme to protect over £280 billion of Royal Bank of Scotland’s financial assets against losses had a beneficial impact on the financial markets. But a National Audit Office report published today finds that the Scheme has, so far, only been partially successful in encouraging lending to creditworthy borrowers on the scale originally envisaged.

The Scheme, launched in early 2009, initially involved two banks. RBS eventually put £282 billion of assets into the Scheme, while Lloyds Banking Group paid £2.5 billion to exit the Scheme in November 2009 and instead raised additional capital from shareholders.

The National Audit Office has reported that, with the exception of some gaps in the Treasury’s analysis of potential fees, the principal elements of the Scheme, particularly the first loss, were based on a robust assessment of the incentives that impact on value for money. They were also based on as complete information on the underlying assets as was available at the time.

As part of the Scheme, Lloyds and RBS agreed lending targets. While both banks met targets for mortgage lending, there was a shortfall of £30 billion against targets for lending to business.

Value for money in the longer term will depend heavily on incentives built into the Scheme to encourage good management of assets. Establishing a requirement for RBS to bear the first £60 billion of losses (a ‘first loss’) was crucial in providing the right incentive for the bank to manage its assets effectively. However, if the first loss is exceeded, RBS will have less financial incentive to avoid further losses although the bank considers it will still have a legal and moral obligation to manage the assets as best it can. The position of taxpayers would be particularly vulnerable if losses were to exceed about £73 billion.


Publication details:

ISBN: 9780102965605 [Buy from TSO]

HC: 567, 2010-2011