RBS toxic assets under scrutiny

By Scott McCulloch on Dec 8, 09 04:39 PM in Banking

Revealing details have now been published by HM Treasury on exactly what sort of assets Royal Bank of Scotland will put into the government's Asset Protection Scheme.

The due diligence of the assets RBS proposed to add to the APS, conducted by Ernst & Young and KPMG for a collective £16.4m fee, identified £43bn of assets they either rejected from the scheme or deemed to "no longer require protection."

So this reduced the £325bn in toxic assets RBS hoped to dump into the APS to £282bn.

However, the Treasury report documenting which of the Scottish bank's assets are entering into the scheme is rather scant on the details of those assets which the auditors refused to add to the APS.

But shareholders in RBS were informed recently of what assets the bank intended to include in the APS, including a breakdown of the £43bn of assets auditors excluded from the scheme.

This list features £12bn in 'credit derivatives' which the bank states are largely in credit default swaps - including £4bn in derivative 'buffers' - and £6.3bn in 'conduits' though no further explanation is given as to what these conduits actually are.

The Treasury report outlining the RBS assets entering the APS states: "Our due diligence has informed a number of changes to the pricing of the APS. In particular, the first loss has increased to £60bn - in line with our view of the expected losses on the assets that are going into the APS.

"It also underpinned the changes to the total size of the pool - the assets that have dropped out were considered either to be incompatible with the APS rules, to entail disproportionate complexity or to no longer require protection.

"This has resulted in a fall in the total value of assets to be included in the APS from £325bn to £282bn."

Assets which were rejected from the scheme included £6.6bn of Irish CRE assets which are potentially covered under the Irish NAMA scheme.

The list RBS sent to shareholders revealed just £2.3bn in assets had been removed from the scheme because they no longer needed protection and around £3bn of assets in structured derivatives, which were deemed ineligible.

RBS also confirmed it would also withdraw £1.2bn of Covered Assets from the APS.

Most of the other exclusions - which exceed £30bn - were made on the grounds of 'disproportionate complexity' so I asked HM Treasury for a list of those assets.

A spokesman replied: "The Treasury and the Asset Protection Agency do not intend to publish detailed information about individual assets or obligors that were due diligenced, given the commercial sensitivity of such information and the risk that releasing such information would hinder the effective operation of the Scheme."

So, roughly speaking, around £30bn in assets RBS hoped to add to the APS were considered by the auditors conducting the due diligence to be of a 'disproportionate complexity'.

Will the tax payer ever find out what these 'complex' assets are or will RBS have to saddle significant losses on products even the professionals have found to be too complex to be entered into a toxic asset insurance scheme?

Hardly surprising then the Treasury upped its first loss figure for RBS assets from £42.2bn to £60bn.

If the total losses surpass £60bn APS rules mean the tax payer is guaranteeing 90p on the pound for these toxic loans and investments.

It's little wonder then it's costing RBS further billions to participate in the scheme.

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