Losses from RBS's toxic loans will be £12bn less

The estimate of potential losses from high-risk Royal Bank of Scotland loans which were ring-fenced under the government's Asset Protection Agency (APA) has been cut by £12 billion to £45bn.

The APA also said yesterday that the UK government was on track to pocket a significant profit from the scheme, which was set up in 2009 to insure potentially toxic assets held by RBS to help shore up confidence in the sector.

Stephan Wilcke, the agency's chief executive, said in its annual update: "Improved market conditions and the passage of time have significantly diminished the risk to HM Treasury as an insurer.

"We are now well on course for HM Treasury to make an overall 5bn profit without having to pay out."

The cover for the RBS assets operates like a conventional insurance policy.

If RBS's assets fall in value, then the bank will absorb the first 60bn of losses.

Further losses would be shared by RBS and the government, with RBS taking 10 per cent of the loss and the government 90 per cent.

The portfolio of RBS assets insured under the scheme has fallen to 182bn from 234bn over the past 12 months. The bank has so far paid the agency 2.1bn in premiums while Lloyds Banking Group, which no longer uses the insurance scheme, paid a total of 2.5bn. RBS has said it could exit the scheme by 2012.

There was speculation earlier this that the bank was looking at leaving at the end of 2011, a move which would see it avoid the 500m payment due for 2012, although RBS would still need to pay out 400m to meet the minimum premium total it has committed to.