Tech and Web NEWS

How Royal Bank of Scotland lost $37 billion: technically insolvent

By Amarendra Bhushan for CEOWORLD Magazine Updated:January 19, 2009

There is an old saying that financial stocks lead the markets up and conversely lead them down. Which way do you think the markets are heading…hint: who’s getting the most help?

Not to worry though, because they say it’s typical during such economic periods and besides, it’s only “theoretical”. That ought to make everyone feel much more at ease. It is the second such bailout in barely three months, paid for once again by taxpayers now and in the future. No one knows what the final cost will be, but it will be many billions of pounds.

Royal Bank of Scotland was a laggard after it warned that it may have suffered the biggest loss in British corporate history — as much as £28 billion ($41 billion) — last year. Shares of Royal Bank of Scotland sank 32% in London trading.

Under the plan, the British Treasury will set up a wide scale insurance program aimed at protecting banks against further losses and guarantee bank assets backed by mortgages and other loans.

- It expected an annual loss of up to 28 billion pounds.
- Government may rais its shareholding in the institution from about 58 percent to about 70 percent.
- the latest steps would cost taxpayers another £100 billion, or $147 billion, on top of the £37 billion plan announced in October and a £20 billion stimulus plan announced in November.
- U.K. financial institutions that take deposits and have more than £25 billion ($37 billion) of eligible assets will be the first banks to be considered for the insurance program.
- Last October, the British Treasury pumped $63 billion into three major banks: the Royal Bank of Scotland, HBOS and Lloyds TSB.

British Treasury’s statement on Royal Bank of Scotland:

- To adjust its commercial investments in the Royal Bank of Scotland Group plc (RBS) to stabilise further its position and ensure it has the tools to enhance its contribution to the long term strength of the economy.

- Has today agreed to convert the Treasury’s preference share investment in RBS to ordinary shares, with the aim of: supporting stability in the financial system; ensuring continued protection for ordinary savers, depositors, businesses and borrowers; and maintaining a safeguard of taxpayer interests.

- Action aims to give the bank the opportunity to build its capital further so that it is able to maintain and increase its support for the real economy by facilitating 6 billion pounds more lending to industry and homeowners, over and above existing commitments.

- The government is not injecting new money into RBS.

- RBS has commited to to maintain, over the next three years, the availability and active marketing of competitively-priced lending to homeowners and to small businesses at 2007 levels or above and to increasing lending still further by 6 billion pounds in the next 12 months.

- Action is intended to make available additional core tier 1 capital to the bank to strengthen its resources, enable it to absorb expected losses and permit it to restructure its finances.

“These are comprehensive measures focused on one purpose: increasing the amount of lending that is available to families and to the businesses who are the backbone of our country and who want to invest and create jobs,” Prime Minister Gordon Brown said.

Britain’s Labour government said it planned to launch The Asset Protection Scheme “designed to protect financial institutions against exposure to exceptional future credit losses on certain portfolios of assets.”

“As part of a comprehensive package designed to reinforce the stability of the financial system, to increase confidence and capacity to lend, and in turn to support the recovery of the economy the government is today announcing its intention to offer protection on those assets most affected by the current economic conditions,” the Treasury said in a statement.

Like this article! ‹ Circuit City negotiations continue; Golden Gate Capital, Pliego and Hilco Merchant Resources eyes United Kingdom’s Treasury Statement on the Government’s Asset protection scheme ›
Share this Post: Get It Delivered To Your Inbox