Britains Treasury, assisted by Credit Suisse and a handful of other experts, is sifting through the assets and pricing the risk of loss. But conditions have changed since February, when the exercise began. The rally in the markets means that even some of the more toxic structured products are now finding piecemeal buyers, and that capital is easier to raise. So RBS and LBG want to renegotiate to reduce the cost of the insurance and the volume of assets they place into the scheme. (They are not the only ones in this position: Bank of America stumped up $425m this week to end a loss-sharing agreement of its own with the American government.)
For RBS the benefits of not placing more shares with the government are marginal: it is already 70% state-owned. But for LBG it could mean the difference between the government owning a 43.4% stake, as it does now, and one of around 65% under the original APS terms. There is a strong incentive for the government, too, to keep the majority of LBGs shares in private hands. Neelie Kroes, the European Unions competition commissioner, has already threatened to order the unbundling of at least some parts of LBG, which is the result of an emergency marriage last September between two already-big banks, Lloyds TSB and HBOS, for which the government hastily waived its own competition rules. The combined group accounts for 24% of retail deposits and 27% of retail mortgages in Britain. Handing over another big dollop of state aid will give Ms Kroes even greater cause for concern.
Nearly a year after Britains ground-breaking bank-recapitalisation plan was launched there is the consolation that the country has a functioning banking system. But there are complaints from businesses, especially smaller ones, that the banks have used the APS to rebuild their balance-sheets while neglecting their side of the bargain, which was to lend more to credit-thirsty borrowers. Even so, it is not clear whether RBS and LBG are really strong enough to loosen their ties to the government. Sentiment towards the walking wounded has improved. But the real test of recovery will be persuading private investors to part with their money.
The Economist Newspaper Limited