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UPDATE 1-UK, banks push on to seal asset bail-out plan

* Asset protection scheme set to come Thursday

* “First loss” level, fee payment sticking points -sources

* Finance minister says no need for full nationalisations

* RBS shares up 5.9 percent, Lloyds rallies 9 percent

(Adds detail from sources, updates shares)

By Sumeet Desai and Steve Slater

LONDON, Feb 25 (Reuters) - Britain’s Treasury and top banks were hammering out final details of a plan to limit lenders’ losses on about 500 billion pounds ($728 billion) of risky assets, which the government said should help prevent full nationalisation.

Britain has pledged to unveil the scheme this week and is expected to announce terms for part-nationalised Royal Bank of Scotland RBS.L and Lloyds Banking Group LLOY.L when they report results on Thursday and Friday, respectively.

Firm details of the asset protection scheme -- dubbed “Operation Broom” -- have not yet been agreed. The key issues are the scale of losses banks will take before the insurance kicks in, and how the banks will pay for the insurance, people familiar with the talks said.

Finance minister Alistair Darling said the aim was to allow banks to lend more, and he played down fears the lenders will be fully nationalised [nLO494305].

By 1240 GMT shares in RBS were up 5.9 percent to 23.4 pence and Lloyds rallied 9.3 percent to 58.9p, two of the top performers in a strong European bank sector.

“It is important that the banks’ equity will continue to be owned by institutional and individual investors as well as by the government,” Darling wrote in Wednesday’s Financial Times.

“That will make it easier for current and future investments in these banks to be returned to full commercial operation.”

His comments echoed U.S. Federal Reserve Chairman Ben Bernanke, who said on Tuesday that U.S. banks should be able to weather the downturn without being nationalised, sending bank stocks sharply higher [nN24405808].

“FIRST-LOSS” UNCERTAINTY

Darling said under the UK plan the government had “made it clear that we expect the banks to enter into legally binding, specific and quantifiable agreements to increase the amount of credit in the economy.”

Under the scheme, first outlined in January, banks will be able to insure themselves against their riskiest assets suffering sharp falls to give them a chance to clean up their balance sheets. [ID:nLO29104]

“There are discussions going on, perfectly proper discussions,” Stephen Timms, Treasury minister, said on Wednesday on BBC television.

“We said last month we would publish the details by the end of this month... and that’s what we’re confident we’re going to be able to do.”

RBS, which is 70 percent owned by the UK government, is expected to put up to 250 billion pounds of assets into the scheme, and Lloyds -- 43 percent state-owned -- could put in a similar amount, according to analysts’ estimates.

The scheme will significantly reduce banks’ risk-weighted assets, boosting their capital ratios to provide a bigger cushion as they face rising bad debts from a faltering economy.

Banks are expected to pay a one-off fee of 3 percent to 4 percent to take part, and discussions continue on the best way for banks to pay the billions of pounds needed, sources said.

Banks are unlikely to pay in cash, and could pay in preference shares, warrants, through deferred tax assets or other instruments.

Lenders were expected to take a “first loss” on the assets of about 10 percent, but that remains one of the key issues that has not been pinned down, the sources said.

In addition to covering toxic structured credit assets, the plan will insure against big losses on commercial property and other corporate loans, higher risk mortgages and other loans. (Editing by David Cowell and Guy Dresser) ($1 = 0.6866 pound)

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