RBS 2008 Annual Report Download - page 123

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RBS Group Annual Report and Accounts 2008122
Credit market and related exposures
Explanatory note (unaudited)
These disclosures provide information for certain of the Group’s
business activities affected by the unprecedented market events of
2008, the majority of which arose within Global Banking and Markets
(GBM). The disclosures are focused around GBM’s credit markets
activities, including the conduit business, which have been particularly
affected by the widespread market disruptions, as well as similar
exposures in US Retail &Commercial (‘Citizens’) and Group Treasury.
In preparing these disclosures, the Group took into consideration the
leading practice disclosure recommendations of the Financial Stability
Forum issued in April 2008.
Market background (unaudited)
Overall, 2008 has been characterised by rapid dislocation in financial
markets. In many cases, the dramatic liquidity squeeze and rise in
funding costs for financial institutions has resulted in reluctance or
inability of market participants to transact, and has adversely affected
the performance of most financial institutions globally, including the
Group. Stock markets have experienced extraordinary falls, and levels of
volatility have been at record highs. Commodity prices have reduced
sharply in the second half of the year, and credit spreads continued to
widen. Market perception of counterparty risk increased and the failure
of major credit protection providers caused fair value losses for the
Group and other market participants and further increased the costs of
mitigating credit exposure. Sustained falls globally in both residential
and commercial real estate prices, fund valuations and worsening loan
performance combined with a sustained lack of liquidity in the market,
resulted in a greater amount of assets being valued at significantly
lower prices.
An indication of the continued decline in the price of asset backed
securities (ABS), in particular those collateralised with sub-prime assets,
is shown in the following graph. While not fully representative of the
Group’s ABS exposures or pricing basis, the ABX series of indices
charted in the graph show, in bond price terms, how differently rated
ABS referencing US sub-prime mortgages securitised in 2007 have
performed during the year.
The graph below provides an indication of the change in credit
worthiness of corporate entities to which the Group has significant
exposure through its credit products in the form of credit derivatives
and bonds. The MarkiT iTraxx Europe graph demonstrates the impact of
the movement of credit spreads in price terms for a basket of European
corporate entities (prices rebased to 100 at the beginning of the year).
14 Nov 07 22 Feb 08 01 June 08 09 Sep 08 18 Dec 08 28 Mar 08
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8 ABX.HE.A
ABX.HE.AA
ABX.HE.AAA
ABX.HE.BBB
ABX.HE.BBB-
92
93
94
95
96
97
98
99
100
101
14 Nov 07
03 Jan 08
22 Feb 08
12 Apr 08
01 Jun 08
21 Jul 08
09 Sep 08
29 Oct 08
18 Dec 08
06 Feb 09
Price estimate