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October 17, 2012

RBS Exits Toxic Assets Scheme

This week sees the Royal Bank of Scotland make its final £1.4million payment to the Asset Protection Scheme (APS), reaching the required £2.5billion minimum payment to exit the emergency insurance programme.

The APS is a state-backed insurance scheme worth £282billion, set up at the beginning of 2009  shortly after the global financial crisis hit and the bank had to be bailed out with tax-payers money (a rescue that left RBS 82% owned by the state). The Lloyds Banking Group was also included in the scheme, but exited in November 2009 saying that the scheme was not needed.

RBS’ exit from the scheme cited the fact that the insurance scheme was no longer needed, that it could manage its toxic assets by itself, as the reason for leaving. It will also go towards saving the bank more than £700million a year. Analysts at Shore Capital said that the protection was “unlikely to be required”, especially as the bank was continuing to sell down its toxic assets.

Now that the Treasury has received £5bn from the APS (including the £2.5bn minimum from Lloyds’ departure), the scheme will now be wound down, with the funds being focused on other economic stimulants. In place of the £700m income the Treasury received from RBS, it will now start to take payments through dividends – which the bank has not paid since it was nationalised. Once dividends begin being paid the bank can restart shareholder pay-outs, an important step towards solid growth.

This comes at a nervous time for the group. Santander had recently begun dealings to purchase 316 high street branches in the UK from RBS, outbidding Richard Branson and Virgin Money for the opportunity. The deal recently fell through as Santander withdrew because of repeated delays to completing the deal, which was more than two years old by this time.

The branches must be sold by the end of 2013 under a state aid agreement with the European Commission, and no request has been made for an extension to this deadline yet although the EC has stated that it will not ‘water down competition rules’.

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