Politicians criticise Treasury over RBS and Lloyds

A shield of arms adorns a wall inside the Treasury in central London, October 20, 2010.

LONDON (Reuters) - A parliamentary committee has criticised the Treasury department for not doing enough to make sure that part-nationalised banks Lloyds and Royal Bank of Scotland lend more to small companies.

In a report published on Wednesday, the cross-party Public Accounts Committee also found flaws with the Treasury's Asset Protection Scheme (APS), set up in 2009 to insure billions of pounds of toxic assets held by RBS.

The government finished with stakes of around 83 percent in RBS and 40 percent in Lloyds after it bailed out both banks with billions of pounds of taxpayers' money during the credit crisis.

The Conservative/Liberal Democrat coalition government has targeted getting banks to lend more to small businesses as a key component in boosting the country's struggling economy.

The Asset Protection Scheme was also intended to encourage RBS and Lloyds to lend more to companies, but the Public Accounts Committee said the Treasury had not adequately censured RBS and Lloyds for missing small business lending targets.

"...The Treasury lacked effective sanctions against RBS and Lloyds when they failed to meet their targets for lending to small businesses in the first year of the scheme," Margaret Hodge, the opposition Labour politician who chairs the committee, said in a statement.

In February, the government finalised a deal with the top UK banks -- RBS, Lloyds, HSBC, Barclays and Santander UK - called "Project Merlin" to get them to curb their bonuses and lend more to companies.

However, critics said the deal was simply "political theatre" since it would be hard to enforce.

"The Treasury appears to lack strong determination to use its influence to increase lending to small businesses. We expect it to find effective mechanisms to ensure the banks meet their lending commitments," added Hodge.

The Asset Protection Scheme insures 230.5 billion pounds of risky assets held by RBS.

The cover for those assets operates like a conventional insurance policy. If RBS's assets fall in value, the bank will absorb the first 60 billion pounds of losses.

Further losses are shared by RBS and the government, with RBS taking 10 percent of the loss and the government 90 percent.

However, the Public Accounts Committee said RBS and Lloyds -- which was originally in the asset protection scheme but then withdrew -- had not given the Treasury sufficiently precise data concerning their balance sheets.

"Both banks found it difficult to provide the Treasury with appropriate and robust data on their assets. We found this alarming," said Hodge.

"It places a question mark over the standards and practices of the banks themselves, and whether or not there was effective oversight by regulators and the banks' own auditors."

(Reporting by Sudip Kar-Gupta; Editing by Mike Nesbit)