The UK Asset Protection Agency, the body charged with managing the UK’s acquisition of toxic debts from the state owned Royal Bank of Scotland, issued its first report and accounts [PDF, 1.8 MB] at the end of July 2010. The Agency insures some £230 billion of more or less troubled assets held by RBS. According to the “best expectations” of the Agency, the UK taxpayer is likely to emerge from the whole RBS/Lloyds Group multi billion pound bailout with zero losses, and potentially with quite a decent profit, possibly as much as £5 billion. At present RBS is the only bank in the scheme. Although it is theoretically open for other banks to apply, something seriously dramatic would have to happen for anyone else to want to come forward at this stage.
However, as the APA’s chief executive, Stephan Wilcke, points out, “the remaining imbalances in the global economy are so significant that we are not counting on a smooth ride. There are plenty of “known unknowns” to worry about at the moment, never mind the “unknown unknowns”, he says in his foreword to the APA Report.
In his original business plan for the APA, Wilcke laid out three tests which would measure the success or failure of his agency. The first would be a judgement on the role the APS manages to play in restoring financial stability to the UK banking sector. The second would see RBS exiting the scheme successfully, reimbursing the APA and the government for any losses paid out on its behalf. The third would see the APA reducing potential losses on the assets it was overseeing. In the report published at the end of July, Wilcke calls points one and two “work still in progress”. He points out that the pool of insured assets covered by the APA remains vulnerable “due to high leverage and significant refinancing risks. The fact that the APA has not been forced to realise even larger losses on RBS’s misguided activities pre the crash is largely down to the current low interest rate regime, he notes.
However, Wilcke praises the way senior RBS management have got to grips with turning round the troubled bank and the progress made in returning it to viability. “(This) is a multi-year journey with a massive amount of change required in almost all areas: culture, systems, capability and financials, to name a few,” he comments. Since the APA by definition inherited a mess, as far as its covered assets were concerned, it was always obvious that big improvements could be made in how these assets are managed, controlled, documented and processed. However, the APA has also had to proceed sensibly, giving RBS management sufficient time and room to put their house in order. This, he notes, is why:
“…the APA has been considered in exercising its formal powers so far and has instead focused on establishing a multi-layered dialogue with RBS designed to flush out issues and seek ways to address them together. In addition in some areas APA has required RBS to appoint external advisors in order to speed up resolution of problem areas and benefit from third party expertise."
The rally from March to June gave RBS the chance to dispose of chunks of assets in the programme at reasonable prices. However, the volatility that has crept into the markets through July, which saw markets retreat from their peaks in a series of reverses, counterpointed by forward surges, has created a very difficult environment for further disposals in the short term. Wilcke and his team will have their hands full over the next year in trying to derisk and manage down RBS’s still extensive portfolio of troubled assets.
Further reading on risk management
- Risk Management at a Crossroads, by Maureen J. Miskovic
- What Models Do We Need for Risk Management? by Riccardo Rebonato
- Understanding Global Risks for the Corporate, by Thierry Malleret
Tags: Asset Protection Agency , economic recovery , financial crisis , Royal Bank of Scotland (RBS) , UK