Now raising intellectual capital
Britain’s state-controlled banks appear to be playing a game of tit-for-tat. Lloyds Banking Group last week admitted it was looking for ways to reduce its exposure to the government’s insurance scheme for toxic assets. Now it turns out that Royal Bank of Scotland is also sounding out investors about tweaking its own involvement in the scheme.
That is where the similarities end, however. RBS is being much less ambitious than Lloyds. It still wants the government to insure all of the assets it agreed to put into the scheme in the winter. It just wants to pay some of the premium in cash rather than its own equity. This may look a superficially attractive way to de-risk the tax-payer’s huge exposure to bank equity, but the government should think hard before accepting.
Unlike Lloyds, RBS is not proposing to scale back its use of the government’s asset protection scheme (APS). Instead, the Scottish bank is considering raising at least 3 billion pounds, about a tenth of its market value, from shareholders to help fund the 6.5 billion pounds it has agreed to pay (but not yet coughed up) in order to participate in the scheme.
When the APS was negotiated in February, RBS offered to pay this fee by issuing the government with `B’ shares that convert into ordinary stock at 50 pence. At the time, when RBS shares were changing hands at around 20 pence, that looked like a pretty good deal for the bank. But the recovery in RBS’s share price now means it can contemplate raising cash privately at a similar price.
Britain’s asset protection scheme, invented to protect the banking system, is morphing into a bureaucratic monster. It’s time to kill it off. Though state support is still needed, there are simpler ways for the government to prop up its ailing lenders.
More than seven months after it was conceived, and five months after Royal Bank of Scotland and Lloyds Banking Group signed up to use it, details of the APS have still not been agreed. The sheer task of sifting through 585 billion pounds worth of loans to be insured by the government means any final agreement is months away.