Asset Protection Scheme

Overview

The Asset Protection Scheme (APS) was a UK government initiative that came into force in February 2009. It was designed to stabilize the banking sector following the global financial crisis of 2007-2008 by encouraging banks to continue lending. The scheme allowed banks holding toxic assets, such as mortgage-backed securities and collateralized debt obligations, to insure themselves against further losses by paying a fee to Her Majesty’s (HM) Treasury. The scheme was terminated in October 2012 after successfully contributing to financial stability.

Definition

The Asset Protection Scheme (APS) aimed to protect UK banks from the adverse effects of losses related to specific assets, commonly referred to as “toxic assets.” By offering this protection, the APS sought to restore lender and investor confidence, enabling banks to continue their traditional lending activities and supporting the broader economy.

Key Features of the APS:

Insurance Against Losses: Banks could insure their toxic assets against further losses by paying a fee to HM Treasury.
Eligibility: Applicable to assets such as mortgage-backed securities and collateralized debt obligations.
Objective: To revive and sustain bank lending and offer support to the overall economy.

Examples

Example 1: A large UK bank heavily exposed to mortgage-backed securities participated in the APS to hedge against potential worst-case scenarios. The insurance paid to HM Treasury safeguarded the bank, enabling it to resume lending activities to small businesses and households.
Example 2: Another financial institution owning a portfolio of collateralized debt obligations utilized the scheme to mitigate risks associated with these toxic assets. By leveraging the APS, the bank didn’t have to freeze its lending operations, thus maintaining a stable credit supply in the economy.

Frequently Asked Questions (FAQs)

What were toxic assets?

Toxic assets refer to financial assets whose value has significantly declined and are considered burdensome to hold. Common examples include mortgage-backed securities and collateralized debt obligations (CDOs), which played a significant role during the financial crisis.

How did the APS work?

Under the APS, banks identified eligible toxic assets and paid a fee to HM Treasury to obtain insurance against further losses from these assets. This enabling them to alleviate severe balance sheet stress and continue lending.

What was the purpose of the APS?

The primary purpose of the APS was to stabilize and restore confidence in the UK banking system, thereby promoting lending activities to support the broader economy during and after the global financial crisis.

When did the APS end?

The APS was terminated in October 2012 after successfully serving its purpose of stabilizing the banking sector and reviving lending activities.

Toxic Assets

Financial assets of problematic value involving substantial risk. These include mortgage-backed securities and collateralized debt obligations.

Mortgage-Backed Securities (MBS)

Securitized representatives of claims on the cash flows of pools of mortgage loans, often associated with entailing significant risk during financial downturns.

Collateralized Debt Obligations (CDO)

A type of structured asset-backed security (ABS) with a complex collection of other securities, often bearing higher risk during financial crises.

TARP (Troubled Asset Relief Program)

A program initiated by the United States government to purchase toxic assets and equity from financial institutions to strengthen the financial sector, similar in intent but different in implementation from the APS.

Online References

Suggested Books for Further Studies

“Too Big to Fail” by Andrew Ross Sorkin - A detailed account of the events leading up to and during the financial crisis.
“The Big Short: Inside the Doomsday Machine” by Michael Lewis - Offers insights into the causes of the financial crisis and the complexities of toxic assets.
“House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again” by Atif Mian and Amir Sufi - Analyzes the impact of household debt on the financial crisis.
“This Time is Different: Eight Centuries of Financial Folly” by Carmen M. Reinhart and Kenneth S. Rogoff - A comprehensive examination of financial crises over centuries.

Accounting Basics: “Asset Protection Scheme” Fundamentals Quiz

### What was the primary purpose of the Asset Protection Scheme (APS)? - [ ] Reduce investment in the stock market. - [x] Stabilize the UK banking system and promote lending. - [ ] Increase consumer spending. - [ ] Reduce bank deposits. > **Explanation:** The APS's primary purpose was to stabilize the UK banking system and promote lending, particularly in the aftermath of the global financial crisis. ### Which assets were primarily covered under the APS? - [x] Mortgage-backed securities and collateralized debt obligations. - [ ] Personal loans and credit card debt. - [ ] Government bonds and corporate bonds. - [ ] Retail inventory and commercial real estate. > **Explanation:** The APS covered primarily toxic assets such as mortgage-backed securities and collateralized debt obligations. ### When was the APS terminated? - [ ] February 2009 - [ ] January 2010 - [ ] March 2011 - [x] October 2012 > **Explanation:** The APS was terminated in October 2012 after it achieved its goal of stabilizing the banking sector. ### Which UK government entity managed the APS? - [ ] Bank of England - [ ] UK Parliament - [x] HM Treasury - [ ] Financial Conduct Authority (FCA) > **Explanation:** HM Treasury managed the APS, overseeing the collection of fees and provision of insurance. ### What was a key condition for a bank to participate in the APS? - [ ] Reducing employee headcount. - [ ] Increasing interest rates. - [x] Paying a fee to HM Treasury. - [ ] Merging with another bank. > **Explanation:** A key condition for participation in the APS was that banks had to pay a fee to HM Treasury. ### What role did the APS play in the global financial crisis? - [x] It helped stabilize the UK banking sector by insuring toxic assets. - [ ] It reduced the overall global debt. - [ ] It increased consumer interest rates. - [ ] It provided subsidies for manufacturing. > **Explanation:** The APS played a pivotal role in stabilizing the UK banking sector by insuring toxic assets during the global financial crisis. ### How did the APS encourage banks to continue lending? - [ ] It offered high interest on deposits. - [ ] It provided grants for new branches. - [x] It insured against losses from toxic assets. - [ ] It reduced tax rates for banks. > **Explanation:** By insuring against losses from toxic assets, the APS provided banks with the confidence to continue lending. ### What are 'toxic assets'? - [ ] High-interest savings accounts. - [x] Financial assets with significantly declined values, considered burdensome. - [ ] Safe-harbor bonds. - [ ] Foreign investments. > **Explanation:** Toxic assets are financial assets with significantly declined values, generally considered burdensome and risky to hold. ### Which two financial instruments were primarily targeted by the APS for insurance? - [ ] Stocks and bonds - [x] Mortgage-backed securities and collateralized debt obligations - [ ] Treasury bills and mutual funds - [ ] Education loans and payday loans > **Explanation:** The APS targeted mortgage-backed securities and collateralized debt obligations for insurance to mitigate further losses. ### What similar program in the United States might be compared to the APS? - [ ] FDIC - [ ] Emergency Economic Stabilization Act - [x] TARP (Troubled Asset Relief Program) - [ ] SEC Investment Plans > **Explanation:** TARP (Troubled Asset Relief Program) in the United States is comparable to the APS as both aimed to stabilize the banking sector by dealing with toxic assets during financial crises.

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