FACTBOX - How the toxic asset insurance scheme works

LONDON Thu Feb 26, 2009 10:23am GMT

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LONDON (Reuters) - The government launched a scheme which could end up insuring more than 500 billion pounds worth of toxic bank assets and risky loans.

Here are some key facts on the scheme:

HOW IT WORKS

In return for a fee, the government will provide banks with protection against losses on risky assets and loans "where there is the greatest amount of uncertainty about their future performance."

Much like many insurance schemes, the banks will be responsible for an excess or what the Treasury calls a "first loss amount" on top of the initial fee.

COST

The Treasury will base the fee and first loss amount on the likely performance of the assets covered. RBS says it will pay a fee of 6.5 billion pounds or 2 percent of the value of the 325 billion pounds of assets it is insuring and be responsible for the first 6 percent or 19.5 billion pounds of losses.

Over and above the "first loss" amount the Treasury will be liable for 90 percent of losses with banks responsible for the remaining 10 percent. The Treasury believes each bank's exposure will be sufficient incentive to keep losses to a minimum.

WHAT'S COVERED

The scheme covers corporate and leveraged loans; commercial and residential property loans and structured credit assets, including residential mortgage-backed securities, commercial mortgage-backed securities, collateralised loan obligations and collateralised debt obligations.

The duration of the scheme will be not less than 5 years and banks will have to give the Treasury access to information required to assess the risk.

CONDITIONS IMPOSED ON BANKS

Each applicant's participation in the scheme will be conditional upon the applicant committing to agreements to increase lending to credit-worthy borrowers. They will report to government on a monthly basis on delivering on the commitments.

RBS has committed to increasing its lending to homeowners and businesses by 25 billion pounds this year and a further 25 billion in 2010.

Banks must also comply with a remuneration policy consistent with the Financial Services Authority's code of practice and "meet the highest international standards of public disclosure" in relation to the assets.

(Reporting by Paul Hoskins; Editing by Hans Peters

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