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Royal Bank of Scotland to make key step towards privatisation

Regulators poised to approve RBS withdrawal from taxpayer-funded protection scheme

By Richard Wachman | 24 July 2012

“Government ownership of the banks has not fixed anything” – Douglas Carswell, Conservative MP

Executives at the state-controlled Royal Bank of Scotland are paving the way for it to return to the private sector within three years.

In a so-far unnoticed proposal buried in a government document, RBS is planning a crucial step towards privatisation by cutting its dependence on the UK taxpayer by September.

RBS has asked regulators to allow it to leave the government-run ‘asset protection scheme’ (APS), which costs the bank an estimated £500 million a year in fees. RBS was forced to sign up to the scheme in 2009 to insure itself against losses linked to toxic loans.

Mike Trippitt, banks analyst at Oriel Securities, the stockbrokers, said: “Once RBS leaves the scheme, the scene is set for privatisation.” The government would, however, wait for the shares to recover before “firing the starting gun.”

Ian Gordon, banks analyst at the broker, Investec, said: “I do not think that there is anyone in the City who seriously expects the government to prevent RBS from leaving the scheme at some point this year. It is more a question of when, rather than if.”

Following a £45 billion bail-out in 2008 in the midst of the financial crisis, the government holds 82 per cent of RBS, which owns NatWest and the Royal Bank of Ulster. The Asset Protection Agency (APA), which runs the APS, gave a strong hint in its annual report published earlier this month that RBS would be allowed to exit the scheme.

Bill Dickinson, chief executive of the APA, which is an agency of the Treasury, said in the report: “When RBS acceded to the scheme, the value of the assets protected by the scheme was unprecedented. Today, the covered amount, while high, has significantly less risk attached.

“It remains my expectation that there will be no pay-out under the scheme.”

City analysts see this as meaning that RBS will be allowed to leave the scheme, allowing privatisation to move ahead.

The bank wants to terminate the APS agreement in September, when it will have paid the minimum fee of £2.5 billion. Lloyds Banking Group, which is 40 per cent owned by taxpayers, left the scheme in 2009 after being briefly covered during the worst period of the ‘credit crunch’.

If RBS exits the scheme as planned, the UK taxpayer will have recouped £5 billion, which is the combined total in APS fees paid by both the bailed-out banks.

RBS’s application needs approval from the Financial Services Authority, the City regulator, and the Treasury.

The FSA declined to comment.

Top-level Treasury sources said that the key to any future sale was the value to be realised.

The government faced criticism when the nationalised Northern Rock was sold at a £400 million loss to Sir Richard Branson’s Virgin Money last November.

The taxpayer is currently sitting on a £26 billion loss with RBS because its share price has been hit by the euro crisis and Britain’s double-dip recession.

Ministers, however, are keen to prepare RBS for privatisation, and the government has begun talks with several potential investors.

Conservatives are even hoping for a share sale to the public, believing that it would help create a feel-good factor ahead of the next general election, which must be held by 2015, as well as jog memories of the privatisation campaigns of the 1980’s.

Douglas Carswell, Conservative MP and a leading privatisation campaigner, said: “An alliance between banks and the state is unhealthy for the body politic. The sooner it ends, the better.

“Government ownership of the banks has not fixed anything,” he said. “There is still a huge shortage of credit.”

Meanwhile, RBS is also in negotiations with the government to change the terms of a financial arrangement that would allow the state to supply emergency capital in the event of another economic meltdown, such as the collapse of the euro.

Depending on the terms of any revised deal, this could see the government increase its stake, up to 84 or 85 per cent.

RBS declined to comment, but referred to a statement made in February by its chief executive, Stephen Hester, in which he said that the bank had to be allowed to “exit” APS.

Update 17 October 2012: RBS today exited the government’s ‘asset protection scheme’. The move is seen as a step towards privatisation of RBS.

Stephen Hester, RBS chief executive, said: “We all want a system in which banks will never again need to seek credit support from government in a financial crisis. Huge progress has been made towards that goal, and our exiting the APS is a significant milestone in RBS’s recovery.”

The chancellor, George Osborne said that the government’s intention is to return RBS “to the private sector when it is value for the taxpayer to do so.” Leaving the scheme is “a step in the right direction”, he said.

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