RBS 2011 Annual Report Download - page 117

RBS Group 2011 115
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 (the output is 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 nil; 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 capital ratio of the Group.
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 assets covered by APS see pages 247 to
249.
Basel III*
The rules issued by the Basel Committee on Banking Supervision
(BCBS), commonly referred to as Basel III, are a comprehensive set of
reforms designed to strengthen the regulation, supervision, risk and
liquidity management of the banking sector. In the EU they will be
enacted through a revised Capital Requirements Directive referred to as
CRD IV.
In December 2010, the BCBS issued the final text of the Basel III rules,
providing details of the global standards agreed by the Group of
Governors and Heads of Supervision, the oversight body of the BCBS
and endorsed by the G20 leaders at their November 2010 Seoul summit.
There are transition arrangements proposed for implementing these new
standards as follows:
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 on 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 Global Systemically Important Banks, will be
phased in from 2013 to 2019.
The Group, in conjunction with the FSA, regularly evaluates its models for
the assessment of RWAs ascribed to credit risk across various classes.
This, together with the changes introduced by CRD IV relating primarily to
counterparty risk, is expected to increase RWA requirements by the end
of 2013 by £50 billion to £65 billion. These estimates are still subject to
change; a degree of uncertainty remains around implementation details
as the guidelines are not finalised and must still be enacted into EU law.
There could be other future changes and associated impacts from these
model reviews.
Other regulatory capital changes*
The Group is in the process of implementing changes to the RWA
requirements for commercial real estate portfolios consistent with revised
industry guidance from the FSA. This is projected to increase RWA
requirements by circa £20 billion by the end of 2013, of which circa £10
billion will apply in 2012.
The Group is managing the changes to capital requirements from new
regulation and model changes and the resulting impact on the common
equity Tier 1 ratio, focusing on risk reduction and deleveraging. This is
principally being achieved through the continued run-off and disposal of
Non-Core assets and deleveraging in GBM as the business focuses on
the most productive returns on capital.
The major categories of new deductions and regulatory adjustments
which are being phased in over a five year period from 1 January 2014
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 changes is expected to be manageable as the
aggregation of these drivers is projected to be lower by 2014 and
declining during the phase-in period.