RBS and Lloyds have agreed to the UK Government’s terms in relation to the Asset Protection Scheme.

The Royal Bank of Scotland (RBS) and Lloyds Banking Group have agreed to the terms associated with the UK Government’s Asset Protection Scheme (APS), it was announced today (3 November 2009).

In January this year the Government announced a comprehensive financial stability package which included the Asset Protection Scheme, designed to restore confidence by protecting financial institutions against exposure to future losses on certain legacy assets.

Discussions have now concluded between the two banks and the Government, and as a result of improved market conditions and following extensive due diligence announced in February, the Government agreed that Lloyds (43.5% state-owned) will not participate in the APS and instead will raise additional private sector capital (£21bn) and pay a fee to the taxpayer for the implicit protection provided to date.

This will reduce the risk borne by the taxpayer, improving value for money, stated The Treasury’s website.

RBS, however, will participate in the APS under revised terms that improve incentives and deliver better risk-sharing with the private sector.

These decisions are intended to reduce the risks on the impact on public finances, and both banks will still be required to meet tough conditions on pay and lending.

To promote greater competition in UK banking, and meet EU State Aid rules, the banks will also be required to make divestments of significant parts of their businesses over the next four years.

RBS will sell 318 branches in England and Wales and will also sell its NatWest brand in Scotland, RBS Insurance and Global Merchant Services, its card payment business.

It will also sell its stake in commodities trader RBS Sempra Commodities.

Lloyds will dispose of more than 600 branches over the next four years –  this will include the TSB brand in England, Wales and Scotland and mortgage broker Cheltenham & Gloucester, as well as the Intelligent Finance online business.

Lloyds says the businesses that it will have to sell off account for about £30bn of customer deposits and £70bn of lending, generating income of £1.4bn in the year to December 2008.

Within the arrangements, both RBS and Lloyds have agreed to increase lending to businesses and property owners by a total of £39bn, and not to pay any bonuses to staff earning more than £39,000 for their 2009 performance.