Today, the U.K. Treasury announced the details of the Asset Protection Scheme (Scheme), “which aims to remove continuing uncertainty about the value of banks’ past investments, cleaning up banks’ balance sheets and providing them with greater confidence to rebuild and restructure their operations and increase lending in the economy.” The U.K. Treasury announced its intention to introduce an asset protection scheme last month. The U.K. Treasury also released a separate statement that provides more details of the Scheme:

Overview

  • In return for a fee, the U.K. Treasury will provide to each participating institution protection against credit losses incurred on one or more portfolios of defined assets to the extent that credit losses exceed a “first loss” amount to be borne by the institution.
  • The Treasury protection will cover 90% of the credit losses which exceed this “first loss” amount, with each participating institution retaining a further residual exposure of 10% of any credit losses exceeding this amount.
  • These terms are very similar to the loss-sharing arrangements entered into by the U.S. Treasury, Federal Reserve and FDIC with both Citigroup and Bank of America.

Eligible Institutions

  • U.K. incorporated authorized deposit-takers (including U.K. subsidiaries of foreign institutions) with more than £25 billion of eligible assets. Affiliated entities of those deposit-takers will also be considered by the Treasury for participation under the Scheme.
  • Eligible institutions desiring to participate in the Scheme must apply by March 31, 2009.
  • Each applicant to the Scheme is required to satisfy several conditions and make monthly reports to the U.K. government.

Eligible Assets

  • Corporate and leveraged loans;
  • Commercial and residential property loans; and
  • Structured credit assets, including residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), collateralized loan obligations (CLO) and collateralized debt obligations (CDO).  

Duration of the Scheme

  • The duration of the coverage will be not less than five years and will be consistent with the tenor of the assets. Participating institutions may terminate their participation in the Scheme at any time in whole or in part with the prior consent of the Treasury.

Asset Management Requirements for Scheme Participants

  • Participants must manage protected assets according to agreed principles and guidelines;
  • Participants must set up effective operating structures to manage and report on protected assets in a regular, transparent, and comprehensive fashion;
  • Participants must implement monitoring and reporting systems which allow verification of asset performance and facilitate determination of payouts;
  • Participants must agree on remuneration policies with the Treasury that align the interests of employees involved in managing assets backed by the Scheme with those of taxpayers;
  • Treasury will have the right to appoint an independent asset manager in prescribed circumstances; and
  • Participants must implement policies regarding the management of conflicts of interest.  

RBS Participation

In addition, the U.K. Treasury announced “an agreement in principle with the Royal Bank of Scotland (RBS) to participate in the Scheme and other financial support to meet its objectives of economic and financial stability.” RBS intends to participate in the Scheme in respect of £325 billion of assets, with RBS retaining first-loss up to £19.5 billion. RBS will pay a participation fee of £6.5 billion to the U.K. Treasury in capital. RBS will make 2009 lending commitments totaling £25 to £9 billion of mortgage lending and £16 billion of business lending. The U.K. Treasury will also make a capital injection of £13 billion into RBS and commit to subscribe for an additional £6 billion of capital at RBS’ option. This is in addition the U.K. government’s restructured investment in RBS last month.