RBS 2010 Annual Report Download - page 440

Glossary of terms continued
Non-conforming mortgages - mortgage loans that do not meet the
requirements for sale to US Government agencies or US Government
sponsored enterprises. These requirements include limits on loan-to-
value ratios, loan terms, loan amounts, borrower creditworthiness and
other requirements.
Option - an option is a contract that gives the holder the right but not the
obligation to buy (or sell) a specified amount of the underlying physical or
financial commodity, at a specific price, at an agreed date or over an
agreed period. Options can be exchange-traded or traded over-the-
counter.
Past due - a financial asset such as a loan is past due when the
counterparty has failed to make a payment when contractually due.
Potential problem loans - are loans other than impaired loans, accruing
loans which are contractually overdue 90 days or more as to principal or
interest and troubled debt restructurings where known information about
possible credit problems of the borrower causes management to have
serious doubts about the borrower's ability to meet the loan's repayment
terms.
Prime -prime mortgage loans generally have low default risk and are
made to borrowers with good credit records and a monthly income that is
at least three to four times greater than their monthly housing expense
(mortgage payments plus taxes and other debt payments). These
borrowers provide full documentation and generally have reliable
payment histories.
Private equity investments - are equity investments in operating
companies not quoted on a public exchange. Capital for private equity
investment is raised from retail or institutional investors and used to fund
investment strategies such as leveraged buyouts, venture capital, growth
capital, distressed investments and mezzanine capital.
Pro forma cost:income ratio -operating expenses excluding purchased
intangibles amortisation, write-down of goodwill and other intangible
assets, integration and restructuring costs and share of shared assets
expressed as a percentage of total income excluding credit market write-
downs and one-off items.
Probability of default (PD) -the likelihood that a customer will fail to make
full and timely repayment of credit obligations over a one year time
horizon.
Regular way purchase or sale - is a purchase or sale of a financial asset
under a contract whose terms require delivery of the asset within the time
frame established generally by regulation or convention in the
marketplace concerned.
Renegotiated loans - loans are generally renegotiated either as part of
the ongoing banking relationship with a creditworthy customer or in
response to a borrower's financial difficulties. In the latter case,
renegotiation encompasses not only revisions to the terms of a loan such
as a maturity extension, a payment moratorium, a concessionary rate of
interest but also the restructuring of all or part of the exposure including
debt forgiveness or a debt for equity swap. Loans renegotiated as part of
the ongoing banking relationship with a creditworthy customer, are
treated as new loans.
Repurchase agreement (Repo) - see Sale and repurchase agreements.
Residential mortgage backed securities (RMBS )-are asset-backed
securities for which the underlying asset portfolios are residential
mortgages.
Restructured loans - see Renegotiated loans.
Retail loans - are loans made to individuals rather than institutions. The
loans may be for car purchases, home purchases, medical care, home
repair, holidays and other consumer uses.
Reverse repurchase agreement (Reverse repo) - see Sale and
repurchase agreements.
Risk asset ratio (RAR) - total regulatory capital as a percentage of risk-
weighted assets.
Risk elements in lending (REIL) - comprise impaired loans, accruing
loans which are contractually overdue 90 days or more as to principal or
interest and troubled debt restructurings.
Risk-weighted assets - assets adjusted for their associated risks using
weightings established in accordance with the Basel Capital Accord as
implemented by the FSA. Certain assets are not weighted but deducted
from capital.
Sale and repurchase agreements - in a sale and repurchase agreement
one party, the seller, sells a financial asset to another party, the buyer, at
the same time the seller agrees to reacquire, and the buyer to resell, the
asset at a later date. From the seller's perspective such agreements are
repurchase agreements (repos) and from the buyer's reverse repurchase
agreements (reverse repos).
Securitisation - is a process by which assets or cash flows are
transformed into transferable securities. The underlying assets or cash
flows are transferred by the originator or an intermediary, typically an
investment bank, to a special purpose entity which issues securities to
investors. Asset securitisations involve issuing debt securities (asset-
backed securities) that are backed by the cash flows of income-
generating assets (ranging from credit card receivables to residential
mortgage loans). Liability securitisations typically involve issuing bonds
that assume the risk of a potential insurance liability (ranging from a
catastrophic natural event to an unexpected claims level on a certain
product type).
RBS Group 2010438
Shareholder information continued