Royal Bank of Scotland may need to pay over 5 billion pounds ($7.1 billion) for a UK government insurance scheme designed to cap any losses on toxic assets set to be unveiled next week.
RBS, which is 70 percent owned by the UK government, is expected to put up to 160 billion pounds of assets into the scheme, which may charge a one-off fee of 3 percent to 4 percent, according to analysts' estimates.
Other banks, notably Lloyds Banking Group and Barclays also face hefty fees for insuring billions of pounds of assets. Up to 500 billion pounds of assets could be put in the scheme, analysts estimate.
Although the fee would dent capital, the plan would significantly reduce the risk weighted assets (RWA) held by the banks as it would cap the amount of potential loss.
The RWA reduction would therefore provide a long-term boost to banks' capital ratios.
The UK government is hammering out the details of the scheme. It is likely banks will face the first 10 percent of losses on assets, and the government will then absorb the bulk of any further losses.
The government hopes the insurance scheme will give banks the confidence they need to reopen lending lines cut off by the credit crisis.
Details on how much of any losses the banks will have to incur before the insurance kicks in and the fee levied for the insurance are expected to be unveiled by the end of this month.
The details could come before RBS, which was rescued with 20 billion pounds of taxpayer cash in October, reports 2008 results on Feb. 26.
In addition to covering toxic structured credit assets, the plan will also insure against big losses on commercial property and other corporate loans, higher risk mortgages and other loans.
Banks are expected to pay a one-off fee, but assets are expected to be covered for five to 10 years. Banks are unlikely to pay in cash, and could pay in preference shares, warrants or through deferred tax assets, according to a note by analysts at Credit Suisse.
RBS could have to pay up to 8 billion pounds — based on putting 200 billion pounds of assets into the scheme at a 4 percent fee — according to Wednesday's Daily Telegraph.
The bank was trying to come up with a plan that would allow it to join the scheme without handing more equity to the government or weakening its capital position, and was working on a plan to pay by issuing capital instruments, the paper said.
RBS declined to comment.
Cazenove analysts estimated the scheme could cover assets approaching 500 billion pounds, although they said it was likely to be smaller. That estimate was based on RBS having about 134 billion pounds of eligible assets, Lloyds having 247 billion pounds and Barclays having 61 billion pounds.
The scheme is likely to be a key element in improving sentiment among UK banks by limiting potential losses if the financial market and economies continue to deteriorate, analysts said.
