RBS 2011 Annual Report Download - page 180

178 RBS Group 2011
Risk management: Credit risk continued
Balance sheet analysis continued
Asset-backed securities
The Group structures, originates, distributes and trades debt in the form of loan, bond and derivative instruments in all major currencies and debt capital
markets in North America, Western Europe, Asia and major emerging markets. The carrying value of the Group's debt securities is detailed below.
2009
2011
Group
2010
Group
Group
before
RFS MI Group
£bn £bn £bn £bn
Securities issued by central and local governments 125.5 127.5 138.8 151.6
Securities issued by corporates 6.0 8.0 12.5 13.3
Securities issued by banks and other financial institutions 77.6 82.0 97.8 102.4
209.1 217.5 249.1 267.3
Asset-backed securities 67.3 70.8 87.6 88.2
The Group’s credit market activities gave rise to risk concentrations in
asset-backed securities (ABS). The Group has exposures to ABS, which
are predominantly debt securities, but can also be held in derivative form.
ABS have an interest in an underlying pool of referenced assets. The
risks and rewards of the referenced pool are passed onto investors by the
issue of securities with varying seniority by a special purpose entity.
Debt securities include residential mortgage-backed securities (RMBS),
commercial mortgage-backed securities (CMBS), collateralised debt
obligations (CDOs), collateralised loan obligations (CLOs) and other
ABS. In many cases, the risk associated with these assets is hedged by
credit derivatives. The counterparties to some of these hedge
transactions are monoline insurers.
The following tables summarise the gross and net exposures and
carrying values of these securities by the location of the underlying
assets at 31 December 2011, 2010 and 2009. Gross exposures
represent the principal amounts relating to ABS. Government sponsored
or similar RMBS comprises securities that are: (a) guaranteed or
effectively guaranteed by the US government, by way of its support for
US federal agencies and government sponsored enterprises or (b)
guaranteed by the Dutch government. Net exposures represent the
carrying value after taking account of protection purchased from monoline
insurers and other counterparties, but exclude the effect of counterparty
credit valuation adjustments. The hedge provides credit protection of both
principal and interest cash flows in the event of default by the
counterparty. The value of this protection is based on the underlying
instrument being protected.
Business review Risk and balance sheet management continued