Exclusive: RBS Heads For Insurance Exit

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The taxpayer-backed Royal Bank of Scotland (LSE: RBS.L - news) (RBS) is trying to extricate itself from a giant insurance scheme before it is forced to pay tens of millions of pounds more for cover it has publicly labelled "worthless".

I have learned that RBS hopes to secure approval from the Financial Services Authority (FSA) and the Treasury in the next few days to exit the Asset Protection Scheme (APS), which was set up during the turbulence of the banking crisis more than three years ago.

The scheme was intended to provide insurance against losses on more than £280bn of toxic assets on RBS’s balance sheet, with the bank paying for losses of up to £60bn.

Stress tests conducted by the City regulator earlier this year suggested that RBS would only make a claim under the APS if economic conditions deteriorated to resemble those of the Great Depression.

RBS has now sold or run off the majority of the assets originally insured by the APS. With the bank now having paid the minimum £2.5bn fee to the Treasury that was agreed when the APS was set up, the scheme no longer provides any economic value to the bank.

RBS's existing premium expires on September 30, after which it should – under the terms of its agreement with the Treasury – pay the next quarterly instalment of a rolling £500m annual fee.

Executives at the bank have told the Treasury and the FSA that paying a further £125m, or more, would be "dead money".

Its (Euronext: ALITS.NX - news) instalments have previously been paid on a quarterly basis. Stephen Hester, RBS's chief executive, has said several times that he expects the bank to be free from the APS's shackles by the end of the year.

Despite RBS's efforts and the fact that negotiations are said to be "calm and practical", FSA and Treasury insiders this weekend played down the prospect of an announcement about RBS's exit from the scheme being made next week.

One official said this evening that RBS still needed to satisfy residual questions about its balance sheet before it would be given the green light to leave the APS.

I am told that a review of RBS's structured credit portfolio (a large volume of complex financial assets) undertaken earlier this year by BlackRock (NYSE: BLK - news) , the asset management giant, provoked disagreement between the bank and the FSA about RBS's financial health.

Nevertheless, hopes have been raised inside the bank that RBS might not be forced to pay another full instalment to the Treasury if the APS is wound up soon after the end of September.

A Treasury source said this evening that the September 30 cut-off for RBS's existing coverage under the APS was "not significant", implying that ministers could waive the remaining fee or levy it on a pro rata basis.

If the Government did agree to that, it would be left open to criticism that it had softened its stance towards a bank that was bailed out with £45bn of taxpayers' money.

A Treasury spokesman declined to comment on the suggestion that it could waive or reduce the fee charged to RBS if the APS is dissolved soon after September 30.

Exiting the scheme would be a milestone in RBS's recovery just under four years after it was rescued and help its long-term transition from perceptions that it remains a ward of the state.

The poor state of the UK economy, though, means that the prospect of taxpayers recouping their investment from their 82% shareholding in the bank remains distant.

RBS and the FSA declined to comment.