RBS 2008 Annual Report Download - page 252

251RBS Group Annual Report and Accounts 2008
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 above. These
commitments and contingent obligations are subject to the Group’s
normal credit approval processes.
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 documentary credits, which are
commercial letters of credit providing for payment by the Group to a
named beneficiary against presentation of specified documents,
forward asset purchases, forward deposits placed and undrawn note
issuance and revolving underwriting facilities, and other short-term trade
related transactions.
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. The Group earned fee income
of £1,442 million (2007 – £695 million; 2006 – £472 million) from
these activities.
The Financial Services Compensation Scheme
The Financial Services Compensation Scheme (FSCS), the UK's
statutory fund of last resort for customers of authorised financial
services firms, pays compensation if a firm is unable to meet its
obligations. The FSCS funds compensation for customers by raising
management expenses levies and compensation levies on the industry.
In relation to protected deposits, each deposit-taking institution
contributes towards these levies in proportion to their share of total
protected deposits on 31 December of the year preceding the scheme
year (which runs from 1 April to 31 March), subject to annual maxima
set by the Financial Services Authority (FSA). In addition, the FSCS has
the power to raise levies (‘exit levies’) on firms who have ceased to
participate in the scheme and are in the process of ceasing to be
authorised for the amount that the firm would otherwise have been
asked to pay during the relevant levy year. The FSCS also has the power
to raise exit levies on such firms which look at their potential liability to
pay levies in future years.
FSCS has borrowed from HM Treasury to fund the compensation costs
associated with Bradford & Bingley, Heritable Bank, Kaupthing Singer &
Friedlander, Landsbanki ‘Icesave’ and London Scottish Bank plc. These
borrowings are on an interest-only basis until September 2011. The
annual limit on the FSCS management expenses levy for the three years
from September 2008 in relation to these institutions has been capped
at £1 billion per annum.
The FSCS will receive funds from asset sales, surplus cash flow, or other
recoveries in relation to these institutions which will be used to reduce
the principal amount of the FSCS's borrowings. Only after the interest
only period, which is expected to end in September 2011, will a schedule
32 Memorandum items
Contingent liabilities and commitments
The amounts shown in the table below are intended only to provide an indication of the volume of business outstanding at 31 December. Although the
Group is exposed to credit risk in the event of non-performance of the obligations undertaken by customers, the amounts shown do not, and are not
intended to, provide any indication of the Group’s expectation of future losses.
Group
More than More than
1 year but 3 years but
Less than less than less than Over
1 year 3 years 5 years 5 years 2008 2007
£m £m £m £m £m £m
Contingent liabilities:
Guarantees and assets pledged as collateral security 29,350 7,738 2,898 9,276 49,262 46,441
Other contingent liabilities 9,093 6,637 2,252 4,293 22,275 15,479
38,443 14,375 5,150 13,569 71,537 61,920
Commitments:
Undrawn formal standby facilities, credit lines and
other commitments to lend
– less than one year 166,572 ———166,572 181,914
– one year and over 22,209 70,301 62,725 30,591 185,826 150,897
Other commitments 6,715 309 1,210 1,092 9,326 5,368
195,496 70,610 63,935 31,683 361,724 338,179