Asset Protection Schemes
An asset protection scheme (APS) is a state-backed insurance scheme designed to protect banks that are exposed to significant levels of non-performing loans. The government generally charges a fee for the cover that it is providing. The idea is based upon the premise that an institution saddled with bad debts will be reluctant to make fresh loans, potentially leading to a credit crunch.
The United Kingdom introduced just such a scheme in February 2009 in the wake of the global financial crisis as an alternative to full public ownership of several banks that were struggling to survive. The scheme covered corporate and leveraged loans, commercial and residential property loans, and structured credit assets, including residential mortgage-backed securities and collateralized debt obligations. The latter two instruments were largely responsible for precipitating the global financial crisis that broke in 2008.
In the UK case, the government agreed to cover 90% of banks’ losses from any loans that are written off. While asset protection schemes may restore liquidity to an economy they also expose taxpayers to potentially huge liabilities. The Royal Bank of Scotland alone, for example, placed over £300 billion of assets with the UK scheme in 2009. The Republic of Ireland introduced the National Asset Management Agency (NAMA) in 2009, which works along similar lines to the UK’s Asset Protection Scheme, and is focused on offering protection to Irish domestic banks. Allied Irish Banks and the Bank of Ireland are the main beneficiaries of NAMA.
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