Toxic Assets Insurance Boosts UK Bank Shares

Britain launched a scheme on Thursday expected to insure more than 500 billion pounds ($712 billion) worth of banks' toxic assets as it aims to spur lending and avert having to fully nationalise top lenders.

British retail banks with more than 25 billion pounds in eligible assets will have until March 31 to join the Asset Protection Scheme which will run for a minimum of five years and cover them against huge losses on their riskiest assets.

Royal Bank of Scotland, already 70 percent owned by the taxpayer, said on Thursday it would put 325 billion pounds of its assets into the scheme as it also announced the biggest loss in UK corporate history -- 24.1 billion pounds.

The government also had to put in another 13 billion pounds into the bank.

Lloyds Banking Group is expected to put in 200 billion pounds worth of risky assets into the scheme on Friday.

Lloyds shares were 30.7 percent up at the close, RBS was 25.5 percent higher and Barclays was 7 percent up.

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"The object of this is to provide that certainty and that confidence that will maintain lending and that's essential," said finance minister Alistair Darling.

UK gilt prices fell sharply after the announcement as stock prices rose on increased investor optimism.

Governments around the world are struggling to end a global credit crunch that started 18 months ago caused by banks nursing trillions of dollars of potential losses on their books after the collapse the U.S. property loans market.

How to hive off troubled assets and purge banks of their worst liabilities will be a focal point of discussion at next month's meeting of G20 finance ministers and central bankers in Britain.

But so far, there has been little common approach and international meetings earlier this month simply had to agree on looking at a common set of principles.

U.S. President Barack Obama's administration wants to buy troubled assets to purge the banks of their worst liabilities.

Sharon Lorimer

Other countries have been looking at the creation of a "bad bank" in which risky securities are ring-fenced.

Insurance Model

Britain has not ruled out a "bad bank" model but has for now opted to go down the insurance route, which requires much less of a cash outlay.

Under the Asset Protection Scheme, banks will pay a fee for the insurance and commit to increase lending as a lack of credit is squeezing both consumers and companies, pushing Britain into its first recession since the early 1990s.

RBS said it would raise its lending by an extra 25 billion pounds over the next 12 months.

Under the scheme, banks will incur a "first loss" and then be covered for the next 90 percent of falling value.

"Both the 'first loss' amount and the residual exposure provide an appropriate incentive for participating institutions to endeavour to keep losses to a minimum on those assets included in the Scheme," the Treasury said.

The scheme will allow banks to put in corporate and leveraged loans, commercial and residential property loans, and structured credit assets including residential and commercial mortgage-backed securities.

The Treasury said it would also consider extending the scheme more widely to other UK incorporated authorised deposit-takers, including subsidiaries of foreign institutions.

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