RBS 2004 Annual Report Download - page 200

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Notes on the accounts
Notes on the accounts continued
Key economic assumptions used in measuring the value of retained interests at the date of securitisation resulting from securitisations
completed during the year were as follows:
U.S. Agency Consumer Commercial
retained retained retained
Assumptions interests interests interests
Prepayment speed 184-480 PSA 4-45% CPR (1) 0-100 CPY (2)
Weighted average life 1-19 years 1-16 years 1-7 years
Cash flow discount rate 2-27% 2-78% 2-12%
Credit losses N/A (3) 0-2% CDR (4) N/A (5)
Key economic assumptions and the sensitivity of the current fair value of retained interests at 31 December 2004 to immediate
adverse changes, as indicated below, in those assumptions are as follows:
U.S. Agency Consumer Commercial
retained retained retained
Assumptions/impact on fair value interests interests interests
Fair value of retained interests at 31 December 2004 £509m £864m £56m
Prepayment speed (6) 12-35% CPR (1) 4-45% CPR (1) 0-100% CPY (2)
Impact on fair value of 10% adverse change £0.3m £16.6m ––
Impact on fair value of 20% adverse change £0.4m £32.8m ––
Weighted average life 1-18 years 1-11 years 1-7 years
Cash flow discount rate 2-33% 2-78% 2-12%
Impact on fair value of 10% adverse change £9.4m £20.0m £0.6m
Impact on fair value of 20% adverse change £18.4m £38.7m £1.2m
Credit losses N/A (3) 0-2% CDR (4) N/A (5)
Impact on fair value of 10% adverse change N/A £7.0m N/A
Impact on fair value of 20% adverse change N/A £14.3m N/A
Notes:
(1) Constant prepayment rate – the CPR range represents the low and high points of a dynamic CPR curve
(2) CPR with yield maintenance provision
(3) Population consists of securities whose collateral is guaranteed by US Government Sponsored Entities and therefore, no credit loss has been assumed.
(4) Constant default rate
(5) Population consists of only investment grade senior tranches; therefore, no credit losses are included in the assumptions at deal settlement.
(6) Prepayment speed has been stressed on an overall portfolio basis for US Agency retained interests due to the overall homogeneous nature of the collateral. Consumer and
Commercial retained interests have been stressed on a security level basis.
The sensitivities depicted in the preceding table are
hypothetical and should be used with caution. The likelihood of
those percent variations selected for sensitivity testing is not
necessarily indicative of expected market movements because
the relationship of the change in the assumptions to the
change in fair value may not be linear. Also, the effect of a
variation in a particular assumption on the fair value of a
retained interest is calculated without changing any other
assumptions. This might not be the case in actual market
conditions since changes in one factor might result in changes
to other factors. Further, the sensitivities depicted above do not
consider any corrective actions that the Group might take to
mitigate the effect of any adverse changes in one or more key
assumptions.
Securitisations (continued)
In some instances, the Group retained certain interests. The
Group typically does not retain a significant portion of the
loans or securities that it securitises. This reduces the impact
that changes to fair values of retained interests might have on
the Group’s financial results.
The Group’s retained interests may be subordinated to other
investors’ interests. The investors and securitisation trusts have
no recourse to the Group’s other assets for failure of debtors to
perform on the securitised loans or securities. The value of the
retained interests varies and is subject to prepayment, credit
and interest rate risks on the transferred assets.
At 31 December 2004, the fair value of the Group’s retained
interests was approximately £1.4 billion (2003 – £1.5 billion).
These retained interests comprises approximately £509 million
in US Agency based retained interests, £864 million in consumer
based retained interests and £56 million in commercial based
retained interests. These retained interests primarily relate to
mortgage loans and securities and arose from securitisations
that have taken place in current and prior years.
Cash flows received in 2004 from retained interests held at
31 December 2004 in connection with securitisations that took
place in current and prior years amounted to approximately
£383 million (2003 – £368 million).
53 Significant differences between UK and US
generally accepted accounting principles (continued)