Public debt exposure 'down £300bn'

The taxpayer's potential exposure to ailing banks has been cut by more than 300 billion pounds, Alistair Darling said

The taxpayer's potential exposure to ailing banks has been cut by more than £300 billion as a result of Tuesday's shake-up, Chancellor Alistair Darling said.

This is accounted for by the £260 billion in toxic loans - mostly from HBOS - which Lloyds is no longer putting into the taxpayer-backed Asset Protection Scheme (APS).

Meanwhile Royal Bank of Scotland has also cut the risky assets it is placing into the APS by £42 billion from the original £325 billion announced in February.

The Chancellor had pencilled in a maximum £50 billion in losses - around 3.5% of the UK's entire annual economic output - on banking sector interventions in April's Budget.

But the Treasury expects to revise these figures downwards shortly in the Pre-Budget Report "subject to wider factors" - although its purchase of shares will add £13 billion to its cash needs this year.

The taxpayer is also nursing paper losses of £4.2 billion on its current £14.5 billion spent on shares in Lloyds, as well as £5.5 billion on the £20 billion pumped into RBS last year.

Now the Government will give an extra £25.5 billion in capital into RBS - although the taxpayer is also on the hook for an extra £8 billion if the bank needs it.

But the APS is now a much cheaper scheme for the bank - in effect "catastrophe insurance" in the words of the bank's directors - with RBS paying £700 million a year until 2011 instead of a £6.5 billion upfront fee.

The bank will also be allowed to claim tax loss and allowances in contrast to the original terms, although it must pay an exit fee of £2.5 billion when it leaves the APS, less fees paid up until that point.

Meanwhile the taxpayer is investing another £5.7 billion in Lloyds to buy up its allotment of shares under the group's £13.5 billion rights issue, although it will receive a £2.5 billion fee from the bank quitting the APS. This net £3.2 billion outlay takes the public funds in Lloyds - which stood at around £14.5 billion earlier - to almost £18 billion.