The Treasury’s scheme to ring-fence toxic loans made by British banks is likely to involve more than £400bn of assets being insured by the taxpayer, The Sunday Telegraph has learnt.
Although the details of the scheme announced last month are still being finalised, submissions from Royal Bank of Scotland and discussions with Lloyds Banking Group suggest that the total value of assets that will ultimately be included in the scheme will be significantly larger than the original estimate of £200bn.
Sources close to the Treasury emphasised last night that the size of the scheme would not necessarily increase the risk to the taxpayer if portfolios of relatively healthy assets were also insured as part of the Treasury’s plan to release capital to allow banks to lend more freely.
The Treasury is still aiming to announce details of the scheme, including its pricing, before the end of the month. Some senior bankers believe the timing should be accelerated, however.
Ernst & Young and PricewaterhouseCoopers, the accounting firms, have been brought in to advise the Treasury alongside Credit Suisse and Citigroup, while KPMG is working with RBS and Lloyds.
Paul Myners, the City minister, is understood to have met with the chairs of the audit committees of each of the major banks to discuss their reviews of the institutions’ balance sheets.
Lord Myners is also considering convening a conference of experienced City non-executive directors and leading institutional investors to discuss governance issues across the industry.
This weekend, the Treasury is also assisting UK Financial Investments on its analysis of banks’ proposed bonus payments.
RBS has indicated that it wants to make about £500m of discretionary payments to employees, with several hundred million pounds more to be paid according to contractual agreements with former employees of ABN Amro and RBS Sempra Commodities, a joint venture where the bonus policy is not dictated by RBS. About £40m is also to be paid to RBS branch staff under a profit-sharing agreement.
People close to RBS insisted last night that no employees in any loss-making areas of RBS would receive a bonus and said that the overall bonus pool was being cut by 60pc.
The cash component of the bonus payments is being slashed by 80pc, they said, reflecting the political sensitivity surrounding the issue.
Barclays, which is also likely to participate in the asset protection scheme, has drawn up plans to pay discretionary bonuses of about £600m, a 55pc fall on last year.
Tomorrow, Barclays will provide an unprecedented level of detail on the state of its balance sheet when it announces full-year pre-tax profits of about £6bn.
The bank will say it enjoyed a strong start to the year in Barclays Capital, its investment banking arm. In an unusual move, Robert Le Blanc, Barclays’ director of risk, will present the results to City analysts alongside the bank’s chief executive and finance director.
If the Treasury’s asset insurance scheme follows a proposed version in the US, fees for banks will be about 4pc of the insured assets. As the Treasury has said the scheme will last for at least five years, banks may be able to pay the fee over a similar period, analysts at JP Morgan Cazenove said.
One of the main aims of the scheme is to allow banks to slash the risk weighting of the assets on their balance sheet, which will free up capital. It is expected that banks will be forced to take the first 10pc of losses in the value of assets, plus 10pc of any further losses. The Treasury will take the hit for any remaining deterioration in value.
Cazenove said: “In most instances, we do not anticipate cumulative losses in excess of 10pc. Yet the insurance provides a restriction on the extent to which the impairment charge can rise for the insurance assets.”
Barclays and RBS declined to comment.
By Mark Kleinman and Katherine Griffiths
Last Updated: 8:48PM GMT 07 Feb 2009
Source: The Telegraph