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What is happening with the asset protection scheme?

Each day brings new rumours regarding Royal Bank of Scotland and Lloyds bank and the company's involvement in the UK government's asset protection scheme. First we hear that both companies are very keen to become involved and then we hear they're looking to backtrack and either reduce their exposure or leave the scheme altogether. So what exactly is going on?

When the UK government introduced the asset protection scheme there were potentially hundreds of billions of pounds of potentially "toxic" assets in the UK banking system. The ability to underwrite these potential problem loans and reduce any further downside appeared to be an excellent opportunity for the likes Royal Bank of Scotland and Lloyds bank. After initially agreeing to join the scheme it soon became apparent that other UK banks were not keen and would rather maintain independence from the government and reduce the government's influence.

It now seems that Royal Bank of Scotland and Lloyds bank would prefer the UK government not to increase stakes in each of the businesses which would be inevitable if they were made to pay the asset protection scheme premiums in shares. Quite what will happen in the short to medium term remains to be seen but this issue will need to be resolved as soon as possible.

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