RBS 2010 Annual Report Download - page 421

Notwithstanding the Group’s participation in the APS and the issue of the
£25.5 billion of B Shares and, if required, the issue of the £8 billion of
Contingent B Shares, the Group remains exposed to a substantial first
loss amount of £60 billion (net of recoveries) in respect of the Covered
Assets and for 10 per cent. of Covered Assets losses after the first loss
amount. There is therefore no assurance that the Group’s participation in
the APS and the issue of B Shares and, if required, the Contingent B
Shares will achieve the Group’s goals of improving and maintaining the
Group’s capital ratios in the event of further losses and improving market
confidence in the Group. Moreover, the Group continues to carry the risk
of losses, impairments and write-downs with respect to assets not
covered by the APS.
Therefore, there can be no assurance that any regulatory capital benefits
and the additional Core Tier 1 capital will be sufficient to maintain the
Group’s capital ratios at the requisite levels in the event of further losses.
If the Group is unable to improve its capital ratios sufficiently or to
maintain its capital ratios in the event of further losses, its business,
results of operations and financial condition will suffer, its credit ratings
may fall, its ability to lend and access funding will be further limited and
its cost of funding may increase. The occurrence of any or all of such
events may cause the price of the Securities to decline substantially and
may result in intervention by the Authorities, which could include full
nationalisation or other resolution procedures under the Banking Act. In
that case, any compensation payable to holders of the Securities would
be subject to the provisions of the Banking Act and investors may receive
no value for their Securities.
If the Group is unable to issue the Contingent B Shares to HM Treasury,
it may have a material adverse impact on the Group’s capital position,
liquidity, operating results and future prospects.
In the event that the Group’s Core Tier 1 capital ratio declines to below 5
per cent., HM Treasury is committed to subscribe for up to an additional
£8 billion of Contingent B Shares if certain conditions are met. If such
conditions are not met and are not waived by HM Treasury, and RBSG is
unable to issue the Contingent B Shares, the Group will be required to
find alternative methods for achieving the requisite capital ratios. Such
methods could include an accelerated reduction in risk-weighted assets,
disposals of certain businesses, increased issuance of Tier 1 capital
securities, increased reliance on alternative government-supported
liquidity schemes and other forms of government assistance. There can
be no assurance that any of these alternative methods will be available or
would be successful in increasing the Group’s capital ratios to the desired
or requisite levels. If RBSG is unable to issue the Contingent B Shares,
the Group’s business, results of operations, financial condition and capital
position and ratios will suffer, its credit ratings may drop, its ability to lend
and access funding will be further limited and its cost of funding may
increase. The occurrence of any or all of such events may cause the
price of the Securities to decline substantially and may result in
intervention by the Authorities or other regulatory bodies in the other
jurisdictions in which the Group operates, which could include full
nationalisation, other resolution procedures under the Banking Act or
revocation of permits and licences necessary to conduct the Group’s
businesses. Any compensation payable to holders of Securities would be
subject to the provisions of the Banking Act, and investors may receive
no value for their Securities.
There are limits on APS coverage and uncovered exposures and risks
may have a material adverse impact on the Group’s business, financial
condition, capital position, liquidity and results of operations.
As a result of the significant volume, variety and complexity of assets and
exposures and the resulting complexity of the APS documents, there is a
risk that the Group may have included assets or exposures within the
Covered Assets which are, or may later become, ineligible for protection
under the APS, which would reduce the anticipated benefits to the Group
of the APS. Further, there is no ability to nominate additional or
alternative assets or exposures in place of any which may turn out not to
be covered under the APS.
Protection under the APS may be limited or may cease to be available
where (i) Covered Assets are not correctly or sufficiently logged or
described, (ii) a Covered Asset is disposed of (in whole or in part) prior to
atrigger event, (iii) the terms of the APS do not apply or are uncertain in
their application, (iv) the terms of the protection itself potentially give rise
to legal uncertainty, (v) certain criminal conduct has or mayhave
occurred in respect of Covered Assets, (vi) a breach of bank secrecy,
confidentiality, data protection or similar laws has occurred or may occur,
(vii) certain of the extensive governance, asset management, audit and
reporting obligations under the UK Asset Protection Scheme Terms and
Conditions (the “Scheme Conditions”) are not complied with, (viii) the
Group does not comply with the instructions of a step-in manager
appointed by HM Treasury or (ix) HM Treasury seeks to appoint a step-in
manager in respect of Covered Assets held within the RBS Holdings N.V.
group (or in certain other jurisdictions) and it is not possible to obtain
consent from the Dutch Central Bank (if required) to such step-in.
419RBS Group 2010
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