To ask Her Majesty's Government what estimate they have made of banks' toxic assets for possible inclusion in a bad bank. [HL1477]

To ask Her Majesty's Government what consideration they have given to the creation of a bad bank. [HL1478]

To ask Her Majesty's Government how a bad bank's assets would be rationed. [HL1480]

On 19 January, the Chancellor of the Exchequer announced further measures designed to reinforce the stability of the financial system, to increase confidence and capacity to lend, and in turn to support the recovery of the economy. This included plans for the asset protection scheme, the details of which were announced on 26 February.

The purpose of the asset protection scheme is to restore confidence in the banks by protecting them against exposure to exceptional future credit losses on certain portfolios of assets. It is therefore aimed at tackling a similar problem to that which a good bank/bad bank scheme would tackle and requires much the same process in terms of identification of assets.

Furthermore, the scheme provides for the Treasury to take over the management of the assets covered by the scheme or to appoint an appropriate third party to do so in certain circumstances. These include instances in which participants have been unable to meet the detailed asset management requirements the Treasury has set or where there would be significant implications for the public finances of not doing so. The Treasury may also agree with the institution at a later date to purchase assets protected by the scheme.

The Royal Bank of Scotland (RBS) and the Lloyds Banking Group (Lloyds) announced their intention to participate in the asset protection scheme (APS) on 26 February and 7 March respectively. RBS and Lloyds intend to protect £325 billion and £260 billion of eligible assets respectively. The banks will pay to the Treasury, in capital, a participation fee of £6.5 billion and £15.6 billion respectively. The agreement will mean that, in the event of a loss, RBS will bear a first loss after existing impairments of up to £19.5 billion, and Lloyds will bear a first loss after existing impairments of up to £25 billion. Thereafter, losses will be borne 90 per cent by the Treasury and 10 per cent by banks.

RBS has also agreed not to claim certain UK tax losses and allowances for a number of years, meaning that, when it returns to profitability, it will not be able to benefit from the losses accrued in the intervening period.