RBS 2004 Annual Report Download - page 181

section
03
179
Annual Report and Accounts 2004
Notes on the accounts
Financial
statements
Banking commitments and contingent obligations, which have
been entered into on behalf of customers and for which there
are corresponding obligations from customers, are not included
in assets and liabilities. The Group’s maximum exposure to
credit loss, in the event of non-performance by the other party
and where all counterclaims, collateral or security proves
valueless, is represented by the contractual nominal amount
of these instruments included in the table. These commitments
and contingent obligations are subject to the Group’s normal
credit approval processes and any potential loss is taken into
account in assessing provisions for bad and doubtful debts in
accordance with the Group’s provisioning policy.
Contingent liabilities
Acceptances – in accepting a bill of exchange drawn on it by
a customer a bank undertakes to pay the holder of the bill at
maturity. Most acceptances are presented for payment and
reimbursement by the customer is usually immediate. In the
UK, bills accepted by certain banks designated by the Bank of
England are eligible for rediscount at the Bank of England.
Endorsements – in endorsing a bill of exchange a bank
accepts liability for payment of any shortfall on the bill at
maturity. Unlike acceptances, the endorsing bank receives
value for the bill, which is then rediscounted.
Guarantees – the Group gives guarantees on behalf of
customers. A financial guarantee represents an irrevocable
undertaking that the Group will meet a customer’s obligations
to third parties if the customer fails to do so. The maximum
amount that the Group could be required to pay under a
guarantee is its principal amount as disclosed in the table above.
The Group expects most guarantees it provides to expire unused.
Other contingent liabilities – these include standby letters of
credit, supporting customer debt issues and contingent
liabilities relating to customer trading activities such as those
arising from performance and customs bonds, warranties and
indemnities.
Commitments
Documentary credits and other short-term trade related
transactions – documentary letters are commercial letters of
credit providing for payment by the Group to a named
beneficiary against presentation of specified documents.
Commitments to lend – under a loan commitment the Group
agrees to make funds available to a customer in the future.
Loan commitments, which are usually for a specified term may
be unconditionally cancellable or may persist, provided all
conditions in the loan facility are satisfied or waived.
Commitments to lend include commercial standby facilities and
credit lines, liquidity facilities to commercial paper conduits
and unutilised overdraft facilities.
Other commitments – these include forward asset purchases,
forward forward deposits placed and undrawn note issuance
and revolving underwriting facilities.
Regulatory enquiries and investigations – in the normal course
of business the Group and its subsidiaries co-operate with
regulatory authorities in various jurisdictions in their enquiries or
investigations into alleged or possible breaches of regulations.
Additional contingent liabilities arise in the normal course of
the Group’s business. It is not anticipated that any material loss
will arise from these transactions.
Litigation
Since December 2003, members of the Group have been
joined as defendants in a number of legal actions in the United
States following the collapse of Enron. Collectively, the claims
are, to a substantial degree, unquantified and in each case
they are made against large numbers of defendants. The
Group intends to defend these claims vigorously. The US
Courts dealing with the main Enron actions have ordered that
the Group join the non-binding, multi-party mediation which
commenced in late 2003. Based on current knowledge
including applicable defences and given the unquantified
nature of these claims, the directors are unable at this stage to
predict with certainty the eventual loss in these matters. In
addition, pursuant to requests received from the US Securities
and Exchange Commission and the US Department of Justice,
the Group has been providing copies of Enron-related
materials to these authorities and the Group continues to co-
operate fully with them.
Members of the Group are engaged in other litigation in the
United Kingdom and a number of overseas jurisdictions,
including the United States, involving claims by and against
them arising in the ordinary course of business. The directors
of the company have reviewed these other actual, threatened
and known potential claims and proceedings and, after
consulting with the Group’s legal advisers are satisfied that the
outcome of these claims and proceedings will not have a
material adverse effect on the Group’s consolidated net assets,
results of operations or cash flows.