Statement on the Governments Asset protection scheme
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Issued 19 January 2009
As part of a a comprehensive package designed to reinforce the stability of
the financial system, to increase confidence and capacity to lend, and in turn
to support the recovery of the economy the Government is today announcing its
intention to offer protection on those assets most affected by the current
economic conditions. The Asset Protection Scheme is designed to protect
financial institutions against exposure to exceptional future credit losses on
certain portfolios of assets. In conjunction with the steps already taken by
the UK authorities and in co-ordination with their international partners, the
Scheme is designed to restore confidence to financial markets, supporting
financial stability and the availability of credit to creditworthy borrowers in
the economy. The Government will be taking forward discussions in the coming
weeks with its international partners about the establishment and co-ordination
of such schemes by a number of countries. This document summarises the headline
terms of how a UK scheme would be implemented.
1.1 Under the Scheme, in return for a fee, the Treasury will provide to each
participating institution protection against future credit losses on one or more
portfolios of defined assets to the extent that credit losses exceed a “first
loss” amount to be borne by the institution. It is intended that the Scheme
will target those asset classes most affected by current economic conditions.
1.2 The Treasury protection will cover the major part but not all of the
credit losses which exceed this “first loss” amount. Each participating
institution will be required to retain a further residual exposure, which is
expected to be in the region of 10 per cent. of the credit losses which exceed
the “first loss” amount. This residual exposure will provide an appropriate
incentive for participating institutions to endeavour to keep losses to a
1.3 The Treasury currently expects that the fee will usually be satisfied by
the issue of capital instruments of the participating institution. These
instruments are not expected to include ordinary shares, but will include a
range of alternative capital instruments. The Treasury will be open to consider
other forms of fee, including cash.
2. Eligible Institutions
2.1 The Treasury will, in the first instance, offer protection to UK
incorporated authorised deposit-takers (including UK subsidiaries of foreign
institutions) with more than £25 billion of eligible assets. Affiliated
entities will also be considered by the Treasury for protection under the Scheme
in the light of its assessment of the impact on financial market stability and
the overall economy and the most effective possible use of public resources.
2.2 The Treasury will subsequently consider extending the Scheme more widely
to other UK incorporated authorised deposit-takers (including UK subsidiaries of
foreign institutions). Further participation in the Scheme will be at the
discretion of the Treasury taking account of the advice of the Bank of England
and the FSA on the basis of its best judgment of how important the deposit-taker
concerned is to financial market stability and the overall economy and the most
effective possible use of public resources.
2.3 The Government’s recapitalisation and credit guarantee schemes continue
to be available to those institutions which are eligible to participate in those
schemes. The Government remains prepared to provide capital to any eligible
institution either directly or, alternatively, on a contingent basis under the
2.4 Each applicant to any of the Government schemes (including the Scheme)
will be required to satisfy the Treasury that:
- it is adequately capitalised and funded or has a realistic plan for
accessing adequate capital and funding;
- it has a sustainable business model and delivery plan;
- its funding profile, sources and mix are clear, broad-based and
- its senior management team is credible, with demonstrable ability to
deliver its business model and delivery plan.
3. Conditions and lending commitments
3.1 Participation in the Scheme will be subject to a number of further
conditions, including a verifiable commitment agreed between the participating
institution and the Treasury to support lending to creditworthy borrowers in a
3.2 A number of further conditions will apply to the Scheme, including in
relation to remuneration policy.
4.1 All participants in the Scheme will be required to meet the highest
international standards of public disclosure in relation to their asset books.
4.2 Subject to maintaining appropriate commercial confidentiality, the
Treasury will publish and lay before Parliament the agreements which it enters
into with participating institutions in relation to the operation of the Scheme.
5. Eligible Assets
5.1 The Scheme will provide protection for portfolios containing assets each
of which must be eligible for the Scheme. The Treasury expects to provide
protection for those assets on an institution’s balance sheet where there is the
greatest degree of uncertainty about the future performance of those assets.
Assets may be denominated in any currency. It is intended that the following
categories of assets will be eligible for the Scheme, subject to assessment by
the Treasury for inclusion on a case-by-case basis:
- Portfolios of commercial and residential property loans most affected by
current economic conditions;
- structured credit assets, including certain asset-backed securities;
- certain other corporate and leveraged loans;
- and any closely related hedges, in each case, held by the participating
institution or an affiliate as at 31st December 2008.
5.2 The Treasury may consider the inclusion of other asset classes in the
Scheme, subject to appropriate investigation by the Treasury and its advisers
and the determination of an appropriate fee.
5.3 Assets to be included in the Scheme will be subject to appropriate
investigation by the Treasury and its advisers in order to assess the
probability of future loss. An applicant will be required to give the Treasury
and its advisers open access to all information required for this purpose.
5.4 The level of protection offered by the Treasury will be determined
following detailed discussions with eligible institutions and their demand for
6. Assessment of “First Loss” Amount and Fee
6.1 In setting the terms under which protection will be offered, the Treasury
and its advisers will take into account their estimation of the performance of
the assets of the institution to be included in the Scheme. The fee, “first
loss” amount to be borne by the institution and residual exposure will be set
6.2 It is intended that pricing of the Scheme will be structured having
regard to international practice so as to provide appropriate incentives to
participating institutions to meet their commitments agreed with the Treasury to
support lending to creditworthy borrowers and to ensure appropriate protection
6.3 Participating institutions will be entitled to cancel the protection,
subject to the agreement of the Treasury and payment of an appropriate
7. Management of the Assets
7.1 Assets included in the Scheme will continue to be managed by the
institution and will remain on its balance sheet but will be required to be
“ring-fenced” by the institution so that actions in relation to them, including
enforcement and disposal, will be subject to appropriate Treasury controls. The
Scheme may also provide for the Treasury to take over ownership and/or
management of the assets in certain defined circumstances.
7.2 The Scheme will include appropriate further requirements as to the
management of the assets by the institution.
7.3 The Treasury will require open access to all information it considers
necessary in connection with the Scheme and will require regular reporting by
the institution to the Treasury.
8. Duration of the Scheme
The duration of the coverage will be determined following examination of the
assets to be included in the Scheme and is expected to be not less than 5 years
and to be consistent with the tenor of the assets.
9. Administration of the Scheme
9.1 The Scheme is expected to be administered by the Treasury or an entity to
be established or designated by the Treasury.
9.2 References in this summary to the Treasury include, where appropriate, an
entity as described in paragraph 10.1.
9.3 The cost of establishing and administering the Scheme will be borne by
10. Regulatory approvals
The Scheme is subject to applicable regulatory and state aid approvals.
10.2 It is not currently intended that there will be any further announcement
relating to the details of the Scheme until the last week of February.
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Article Published/Sorted/Amended on Scopulus 2009-01-19 12:32:21 in Business Articles