RBS 2010 Annual Report Download - page 134

Business review continued
132 RBS Group 2010
Balance sheet management: Capital* continued
Regulatory developments continued
Basel III capital deductions and regulatory adjustments
In addition to the changes outlined above, Basel III will also result in
revisions to regulatory adjustments and capital deductions. These will be
phased in over a five year period from 1 January 2014. The initial
deduction is expected to be 20%, rising 20 percentage points each year
until full deduction by 1 January 2018. However, this is subject to final
implementation rules determined by the FSA. The proportion not
deducted in the transition years will continue to be subject to existing
national treatments.
The major categories of deductions include:
xexpected loss net of provisions;
xdeferred tax assets not relating to timing differences;
xunrealised losses on available-for-sale securities; and
xsignificant investments in non-consolidated financial institutions.
The net impact of these adjustments is expected to be manageable as
most of these drivers reduce or are eliminated by 2014.
Other regulatory developments
Treatment of Systemically Important Financial Institutions (SIFIs)
Policy development around contingent capital and loss absorbency forms
part of a wider policy initiative on addressing systemic institutions. A
Financial Stability Board outline framework and plan of action was
endorsed by G20 leaders at the November 2010 Seoul Summit. This
now forms the main focus of global policy making following the
finalisation of the Basel III framework. Policy initiatives in this area may
include proposals for greater loss absorbency for systemic firms, the
development of enhanced supervision and resolution frameworks, as well
as recovery and resolution plans.
The EU Commission Consultation
Crisis management proposals
The EU Commission issued a consultation paper on crisis management
measures in January 2011. It covers prevention tools (such as recovery
planning requirements, supervisory powers and new ideas on intra-group
financial support mechanisms), as well as resolution tools (including
partial transfer powers and possible approaches to debt write-down. The
consultation will inform draft implementing legislation expected this
summer, and is intended to help shape the global framework for SIFIs.
Markets in Financial Instruments Directive Review
The EU Commission published a consultation on revising the Directive on
Markets in Financial Instruments (MiFID2). The main proposals in the
consultation are the extension of the transparency rules to include bonds
and over the counter derivatives, measures to reinforce regulation of
commodity derivatives and high frequency trading, strengthening investor
protection and detailing the role of the new European Securities and
Markets Authority.
Financial activities tax
In a recent speech, the EU Tax Commissioner talked about the
introduction of a potential Financial Activities Tax at a European level.
There will be an impact assessment in 2011 to review the cumulative
impact on financial institutions of new regulation, bank levy and taxes, as
part of the Commission's on-going examination of possible tax measures.
Dodd-Frank
In the United States the Dodd-Frank Wall Street Reform and Consumer
Reform Act (Dodd-Frank) contains very significant reforms the full effect
of which can only be assessed when the implementation rules are
finalised. There have also been numerous derivative proposals from the
Commodity Futures Exchange Commission (CFTC) and the Securities
and Exchange Commission (SEC) plus joint agency proposals to
implement minimum capital standards (Collins Amendment) and market
risk capital guidelines.
Project Merlin
On 9 February 2011, the UK Government and the major British banks
including the Group, announced the creation of an accord, known as
Project Merlin, aimed at demonstrating the clear and shared intent to
work together to help the UK economy recover and grow. The banks:
xwill work to foster credit demand, particularly among small and
medium-sized businesses, and will make available additional
lending capacity if demand should materialise above their current
expectations;
xexpect to contribute more in UK tax as their performance
strengthens and their profits grow and will jointly contribute an
additional £1 billion to the Business Growth Fund;
xconfirm that the aggregate 2010 bonus pool including deferrals for
their UK-based staff will be lower than that of 2009 and will reflect
the engagement each bank has had with the Financial Services
Authority, the UK Government and its shareholders, as well as their
duty to manage pay policy to protect and enhance the long-term
interests of shareholders; and
xwill extend disclosure of remuneration details of their most senior
executives beyond international norms.
The Government has in the light of the banks’ statements affirmed its
commitment to maintaining a strong, resilient, stable and globally
competitive UK financial services sector, and to implementing and
applying European and international regulation to create a level playing
field in both policy and practice.
*unaudited