RBS 2010 Annual Report Download - page 133

Regulatory developments
Basel III and CRD IV
The Basel Committee released the final text on the new Basel III Capital
and Liquidity Frameworks in December 2010, the contents of which were
broadly as expected. Whilst most of the new rules are ‘final’ there are
lengthy observation periods for the more novel elements (the liquidity
coverage ratio, the net stable funding ratio and the leverage ratio)
designed to identify any unintended consequences prior to full
implementation and it is possible that some of the detail may be amended.
The capital requirements for credit valuation adjustments (CVAs) with
respect to counterparty risk are subject to a final impact assessment
which is being carried out in the first quarter of 2011. The Committee’s
guidance on the countercyclical capital buffers allows for significant
judgement which will need to be clarified by national regulators. The
potential impacts for RBSG are set out below.
xnational implementation of increased capital requirements will begin
on 1 January 2013;
xthere will be a phased five year implementation of new deductions
and regulatory adjustments to Core Tier 1 capital commencing 1
January 2014;
xthe de-recognition of non-qualifying non common Tier 1 and Tier 2
capital instruments will be phased in over 10 years from 1 January
2013; and
xrequirements for changes to minimum capital ratios, including
conservation and countercyclical buffers, as well as additional
requirements for Systemically Important Financial Institutions, will be
phased in from 2013 to 2019.
The focus will now be on the EU’s implementation of the Basel framework.
The Commission’s legislative proposal - the Capital Requirements
Directive (CRD) IV - is expected to appear in summer 2011.
Contingent capital and loss absorbency
The Basel Committee issued its final rules on the requirements to ensure
all classes of capital instruments fully absorb losses at the point of non-
viability, before tax payers are exposed to loss. These are designed to
combat the experience during the crisis where holders of Tier 2 capital
instruments did not suffer any losses when banks were bailed out by the
public sector. Debate continues, meanwhile, over possible requirements
for bailing-in senior debt holders, as a further means of protecting the
taxpayer.
Implementation by the Group
RBS is advanced in its planning to implement these newmeasures and is
appropriately well-capitalised with tangible equity of £56 billion, Core Tier
1capital of £49 billion and a Core Tier 1 ratio of 10.7% at 31 December
2010.
Set out below are indicative impacts and timings of the major Basel 2.5
and Basel III proposals on the Group’s Core Tier 1 ratio. The estimates
are still subject to change; a high degree of uncertainty still remains
around implementation details as the guidelines are not fully finalised and
must still be converted into rules by the FSA.
Asubstantial part of the mitigating impacts mentioned in the following
paragraphs relate to run-off in the normal course of business and de-
leveraging of legacy positions and securitisations, including Non-Core.
The Group is also devoting considerable resource to enhancing its
models to improve management of market and counterparty exposures.
Akey mitigating action related to counterparty risk involves enhancement
to internal models, which is a significant undertaking. There could be
various hedging strategies and business decisions taken as part of
mitigation which may have an adverse, but manageable, impact on
revenues.
CRD3 (Basel 2.5): Published rules for market risk and re-securitisations.
Proposed implementation date 31 December 2011
The estimated impact on pro-forma at the end of 2011 on RWAs post
mitigation is an increase of £25 billion to £30 billion, split equally between
GBM and Non-Core.
Basel III Counterparty risk: Proposed implementation date 1 January
2013
The impact on RWAs on implementation in 2013 is currently estimated at
£45 to £50 billion post mitigation and deleveraging, although there may
still be movement in the final framework around this risk.
Basel III Securitisations: Proposed implementation date 1 January 2013
Under the proposals, current deductions under Basel II (50% Core Tier 1,
50% Tier 2) for securitisation positions are switched to RWAs weighted at
1,250%. Post the run-off of securitisation positions and mitigating actions,
the impact on implementation in 2013, on RWAs is estimated to be an
increase of £30 billion to £35 billion with a corresponding reduction in
deductions from Core Tier 1 and Tier 2 capital of £1.2 billion to £1.5
billion each. The impact net RWA equivalent of this change assuming a
10% Core Tier 1 ratio would be an increase in net RWA equivalents of
£18 billion to £20 billion.
Summary impacts
The extent of the individual areas of impact, as set out above, may
continue to change over time. As previously indicated, however, the
overall impact on RWAs of CRD III and CRD IV after mitigation and
deleveraging is estimated to be £100 billion to £115 billion, before
allowing for the offsetting reduction in deductions.
The impact referenced above would lower the Core Tier 1 ratio by
approximately 1.3%, assuming RWAs of £600 billion and a Core Tier 1
ratio of 10%.
131RBS Group 2010
Business review
Risk and balance sheet management