RBS 2005 Annual Report Download - page 204

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Notes on the accounts
Notes on the accounts continued
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
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
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 deposits placed and undrawn note issuance and
revolving underwriting facilities, documentary credits and other
short-term trade related transactions.
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
Proceedings, including a consolidated class action, have been
brought in the United States against a large number of
defendants, including the Group, following the collapse of
Enron. The claims against the Group could be significant but
are largely unquantified. The Group considers that it has
substantial and credible legal and factual defences to these
claims and it continues to defend them vigorously. A court
ordered mediation commenced in September 2003 but no
material progress has been made towards a resolution of the
claims, although a number of other defendants have reached
settlements in the principal class action. The Group is unable
reliably to estimate the possible loss in relation to these matters
or the effect that the possible loss might have on the Group’s
consolidated net assets or its operating results or cash flows
in any particular period. In addition, pursuant to requests
received from the US Securities and Exchange Commission
and the Department of Justice, the Group has provided
copies of Enron-related materials to these authorities and
has co-operated 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 Group has
reviewed these other actual, threatened and known potential
claims and proceedings and, after consulting with its legal
advisers, is satisfied that the outcome of these other claims
and proceedings will not have a material adverse effect on
its consolidated net assets, operating results or cash flows
in any particular period.
Trustee and other fiduciary activities
In its capacity as trustee or other fiduciary role, the Group
may hold or place assets on behalf of individuals, trusts,
companies, pension schemes and others. The assets and their
income are not included in the Group’s financial statements.
35 Memorandum items (continued)