RBS May Have to Pay Over $7bn for UK Govt Scheme

Royal Bank of Scotland may need to pay over 5 billion pounds ($7.1 billion) for a UK government insurance scheme set to be unveiled next week that would cap losses on billions of pounds of toxic assets.

RBS, which is 70 percent owned by the UK government, is expected to put up to 200 billion pounds of assets into the scheme, which may charge a one-off fee of 3 percent to 4 percent, according to analysts' estimates.

Other banks, notably Lloyds Banking Group and Barclays, also face hefty fees for insuring billions of pounds of assets.

Analysts estimate up to 500 billion pounds of assets could be put in the scheme, but say the more is put in the better it is for banks as it would significantly reduce their risk weighted assets (RWA) and cap the amount of potential loss.

That should benefit banks' capital ratios.

Sharon Lorimer

"The more assets that are ring-fenced, the better, in our view," Jonathan Pierce, analyst at Credit Suisse, said in a note to clients on Wednesday.

The UK government is hammering out the details of the scheme.

It is likely banks will face the first 10 percent of losses on assets, and the government will then absorb the bulk of any further losses.

The government wants the insurance scheme to give banks the confidence they need to reopen lending lines cut off by the credit crisis.

Details on how much of any losses the banks will have to incur before the insurance kicks in and the fee levied for the insurance are expected to be unveiled by the end of this month.

The details could come before RBS, which was rescued with 20 billion pounds of taxpayer cash under October's bank rescue plan, reports 2008 results on Feb. 26.

Toxic Assets, Corporate Loans

In addition to covering toxic structured credit assets, the plan will also insure against big losses on commercial property and other corporate loans, higher risk mortgages and other loans.

Banks are expected to pay a one-off fee, but assets are expected to be covered for five to 10 years and the payment could be spread over several years.

Banks are unlikely to pay in cash, and could pay in preference shares, warrants or through deferred tax assets, Credit Suisse analysts said.

RBS could have to pay up to 8 billion pounds -- based on putting 200 billion pounds of assets into the scheme at a 4 percent fee -- according to Wednesday's Daily Telegraph.

The bank was trying to come up with a plan that would allow it to join the scheme without handing more equity to the government or weakening its capital position, the paper said. RBS declined to comment.

RBS shares were down 12.6 percent at the close, as worries persist that it could be nationalized.

Shares in Lloyds, expected to be the other big user of the scheme, were down 1.5 percent.

Credit Suisse's Pierce said a rough estimate that RBS could put 200 billion pounds into the scheme, with a 3 percent fee spread over five years, could improve its Core Tier 1 capital ratio to 7 percent.

Cazenove analysts estimated the scheme could cover assets approaching 500 billion pounds, although they said it was likely to be smaller.

That estimate was based on RBS having about 134 billion pounds of eligible assets, Lloyds having 247 billion pounds and Barclays having 61 billion pounds.

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