Alistair Darling is under pressure to prove Britain is serious about cleaning up the toxic bank balance sheets, after missing the summer deadline for signing insurance deals with RBS and Lloyds worth £585bn.
The chancellor has told officials to accelerate work on finalising the deals, fearing that delays could undermine Britain’s ability to lecture other countries at September’s G20 summit in Pittsburgh on the need for urgent action to clean up their banks.
Gordon Brown’s team is growing irritated that RBS and Lloyds have still not signed legal deals under the government’s flagship asset protection scheme, in spite of agreeing their participation in principle in March.
The Treasury had intended to finalise legal agreements before the summer break, with RBS expected to insure £325bn and Lloyds £260bn of impaired assets; the insurance premium is being paid in shares.
However, the banks, which will reveal first-half results this week, are not ready to sign the documents until September because of the volume of due diligence on the loans still being undertaken.
The two banks have made clear they are dealing with vast amounts of complex legal documentation that has to accompany each loan that is included in the scheme.
“This is incredibly complicated as each loan has to be looked at individually. It’s like looking up at a mountain where you are not sure if you are near the top yet,” said one person with knowledge of the situation.
Mr Brown’s colleagues say the Treasury took its foot off the pedal after the scheme was announced in March and that some senior officials were diverted to other tasks as the worst of the banking crisis passed.
However, uncertainty continues over the precise legal arrangements for the scheme; the delays also present a political problem for Mr Brown ahead of the G20 meeting on September 24 and 25.
Mr Brown claims to have led the world in stabilising Britain’s banks and has urged the US and western European countries – including France, Germany and Spain – to take robust action to deal with toxic assets.
George Osborne, shadow chancellor, fears that the asset protection scheme does not provide enough protection for taxpayers for very severe losses and wants contracts to give more incentives to banks to manage bad assets effectively.
“Above all, taxpayers need to know that their interests are being looked after and that the banks are going to have actively manage the loans that are being insured, rather than just letting them drift,” he said.
Under the terms of the scheme, Lloyds must absorb the first £25bn of any losses, after which the taxpayer will pick up 90 per cent of the remaining losses and Lloyds will only be on the hook for a further 10 per cent.
RBS will take the first £19.5bn of any losses from loans insured in the scheme, after which the taxpayer will pick up 90 per cent of the losses and RBS will only have to absorb the remainder.
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