RBS 2010 Annual Report Download - page 132

Balance sheet management: Capital* continued
Asset Protection Scheme
The Group acceded to the Asset Protection Scheme (‘APS’ or ‘the
Scheme’) in December 2009.
Following the accession to the APS, HM Treasury provides loss
protection against potential losses arising in a pool of assets. HM
Treasury also subscribed to £25.5 billion of capital in the form of B shares
and a Dividend Access Share, with a further £8 billion of capital in the
form of B shares potentially available as contingent capital. The Group
pays annual fees in respect of the protection and contingent capital. The
Group has the option, subject to HM Treasury consent, to pay the annual
premium, contingent capital and the exit fee payable in connection with
any termination of the Group’s participation in the APS in whole or in part,
by waiving the entitlements of members of the Group to certain UK tax
reliefs.
Following accession to the APS, arrangements were put in place within
the Group that extended effective APS protection to all other regulated
entities holding assets covered by the APS.
Regulatory capital impact of the APS
Methodology
The regulatory capital requirements for assets covered by the Scheme
are calculated using the securitisation framework under the FSA
prudential rules. The calculation is as follows (known as ‘the uncapped
amount’):
xFirst loss - the residual first loss, after impairments and write-downs,
to date, is deducted from available capital split equally between
Core Tier 1 and Tier 2 capital;
xHM Treasury share of covered losses - after the first loss has been
deducted, 90% of assets covered by HM Treasury are risk-weighted
at 0%; and
xRBS share of covered losses - the remaining 10% share of loss is
borne by RBS and is risk-weighted in the normal way.
Should the uncapped amount be higher than the capital requirements for
the underlying assets calculated as normal, ignoring the Scheme, the
capital requirements for the Scheme are capped at the level of the
requirements for the underlying assets (‘capped amount’). Where capped,
the Group apportions the capped amount up to the level of the first loss
as calculated above; any unused capped amount after the first loss
capital deduction will be taken as RWAs for the Group’s share of covered
losses.
Adjustments to the regulatory capital calculation can be made for either
currency or maturity mismatches. These occur where there is a difference
between the currency or maturity of the protection and that of the
underlying asset. These mismatches will have an impact upon the timing
of the removal of the cap and level of regulatory capital benefit on the
uncapped amount, but this effect is not material.
Impact
The Group calculates its capital requirements in accordance with the
capped basis. Accordingly, the APS has no impact on the Pillar 1
regulatory capital requirement in respect of the assets covered by the
APS. It does, however, improve the Core Tier 1 total capital ratio, of the
Group as a whole. The protection afforded by the APS assists the Group
in satisfying the forward looking stress testing framework applied by the
FSA.
Future regulatory capital effects
As impairments or write-downs on the pool of assets are recognised, they
reduce Core Tier 1 capital in the normal way. This will reduce the first
loss deduction for the Scheme, potentially leading to a position where the
capital requirement on the uncapped basis would no longer, for the
assets covered by the APS, exceed the Non-APS requirement and as a
result, the Group would expect to start reporting the regulatory capital
treatment on the uncapped basis.
For further information on the APS see page 221.
*unaudited
RBS Group 2010130
Business review continued