RBS takes UK insurance, to split assets after record $462-bn loss

Royal Bank of Scotland Group will put £325 billion ($462 billion) of investments into a state insurance programme and shift toxic assets to a new unit after posting the biggest loss in British history.

Edinburgh-based RBS, the largest bank controlled by the UK government, plans to transfer £540 billion of assets, including derivatives and loans on commercial and residential property, to the new division, mirroring the so-called bad bank created by Citigroup last month.

RBS and Lloyds Banking Group rose more than 25 per cent in London trading as the government provided a bigger guarantee than analysts had estimated. Prime Minister Gordon Brown’s government agreed to insure the distressed assets of British banks to boost capital, spur lending and jumpstart the economy, which shrank 1.5 per cent in the fourth quarter.

“It draws a line under the problems of what we know is a very weakened business,” said Julian Chillingworth, chief investment officer at London-based Rathbone Brothers, which manages $21 billion including shares of RBS and Lloyds. “The asset protection scheme is more generous to the banking sector than was previously thought.”

In return for the insurance, RBS will pay a fee of £6.5 billion over seven years in the form of preference shares. It will also increase lending to the UK homeowners and businesses by £50 billion over the next two years, the company said in a statement.

Treasury investment
The bank will be responsible for the first £19.5 billion of losses on the insured assets. The bank will cover 10 per cent of any additional losses, with the Treasury responsible for the rest. The Treasury will buy £13 billion of the preference shares, which pay 7 per cent interest, and may purchase an additional £6 billion worth at RBS’s discretion.

Lloyds is in talks with the Treasury on participating in the insurance programme. No terms have been agreed and there is no certainty Lloyds would receive the same terms as RBS, the London-based company said in a statement.

“We’re going to rebuild confidence and provide certainty to enable banks to maintain and extend lending,” Chancellor Alistair Darling said in an interview on Thursday.

RBS rose 29 per cent to 29.8 pence as of 9:45 a.m. in London, with Lloyds gaining 25 per cent to 71.8 pence.