Major High Street Banks Join Government Scheme
Two of the major high street banks in the UK are to take advantage of the newly introduced Government rescue scheme, in a bid to free up more liquidity and be able to offer loans to consumers once more.
Both the Lloyds Banking group and the Royal Bank of Scotland have announced that they will be entering into the Government’s asset protection scheme, offloading billions of pounds worth of what have become known as “toxic debts”, from high risk bad credit loans in arrears and default situations, which the banks currently have to allow for from their own assets.
The asset protection scheme allows banks to exchange these bad credit loans for Government backed bonds, effectively allowing the Government (and the tax payer) to cover the risk of these loan liabilities and offer protection for the balance sheets of the bank in question, thereby allowing them to focus their attention on more profitable, creditworthy areas of their business.
As part of the scheme, each bank is required to pay a fee to the Government to join the scheme, (in the case of RBS this is £6.5 billion) and are committed through a legal agreement to increase their lending levels through extra homeowner loans and small business loans.
The Royal Bank of Scotland recently announced record losses of £28 billion and Lloyds Banking Group saw an 80 per cent drop in profits, largely from taking over HBoS which announced losses of almost £11 billion. RBS will be placing £325 billion worth of toxic debts into the scheme.
Lord Myners of Truro, City Minister had previously commented that both banks would benefit greatly from the rescue scheme. He said “An effective banking system is the cornerstone of a strong economy. All the measures we have put in place are all designed to get the banking system working again.”
