RBS 2011 Annual Report Download - page 242

240 RBS Group 2011
Risk management: Compliance risk* continued
Aprogress report on the action plan was issued at the Cannes summit.
Key developments during 2011 included the following:
Basel III
Following publication by the Basel Committee on Banking Supervision in
December 2010 of rules for the new Basel III capital and liquidity
framework, work during 2011 focused on finalising the remaining
elements of policy and preparing for implementation. Highlights were:
xThe issuance of minimum requirements regarding the loss
absorbency of capital instruments at the point of non-viability
(January 2011);
xThe finalisation of rules for the capital treatment of counterparty
credit risk in bilateral trades (June 2011);
xTechnical changes to Basel III relating to the treatment of trade
finance, aimed at helping promote trade with low-income countries
(October 2011);
xFurther work on the capitalisation of bank exposures to central
counterparties (November 2011); and
xABasel Committee paper proposing that debit valuation
adjustments for over-the-counter derivatives and securities financing
transactions should be fully deducted from Common Equity Tier 1
capital (December 2011). The Group is evaluating the potential
impact of this proposal.
Systemic financial institutions
The main focus of policy development at the global level during 2011 was
delivering on the G20-mandated target of agreeing a framework by the
end of 2011 for dealing with global systemically important financial
institutions (G-SIFIs). This target was met, with the Cannes summit
endorsing:
xAnew Financial Stability Board (FSB) international standard, “The
Key Attributes of Effective Resolution Regimes for Financial
Institutions”, which amongst other things provides a benchmark for
national resolution regimes, as well as mandatory requirements for
resolvability assessments and recovery and resolution plans for
each G-SIFI; and
xAnew Basel Committee framework for identifying an initial list of
global systemically important banks (G-SIBs), and applying to these
an additional common equity capital requirement, above the Basel III
minimum standards, rising from 1% to 2.5% of risk-weighted assets
in line with their systemic impact.
The names of the initial list of G-SIBs (though not their ranking) were
published by the FSB at the end of the summit: RBS is included in the 29
names.
Shadow banking
In response to concerns, that heightened regulation of banks should not
lead to risks being displaced into unregulated sectors, regulatory
authorities started to pay growing attention to the “shadow banking”
system during 2011. This term broadly refers to entities and financial
transactions that fall outside the scope of existing financial (banking)
regulation, such as hedge funds, money market funds and structured
investment vehicles.
Work was initiated in five areas to assess the need for regulatory
intervention, and this topic is likely to attract even more attention during
2012, when recommendations for action are expected.
The five areas include: banks’ interactions with shadow banking entities;
ways to reduce the susceptibility of money market funds to runs; the
regulation of other shadow banking entities on prudential grounds;
retention requirements and transparency in securitisation; and the
possible regulation of margins and haircuts in securities lending and
repos.
Other
During 2011, the authorities started to pay more attention to the
consistent implementation of G20 and FSB financial reforms, with plans
developed to focus more on monitoring and the public reporting of
implementation progress. Although a priority, little progress was made
during 2011 on developing a global policy framework for over-the-counter
derivative reform, so as to help align ongoing activity in this space,
particularly in the US and the EU (see below).
EU regulatory developments
The EU regulatory agenda in 2011 continued to focus mainly on
prudential and market structure measures; retail issues also started
receiving more attention and are likely to come under increased focus in
2012. Key highlights were as follows:
New regulatory architecture
2011 saw the implementation of a new EU regulatory architecture, with
the start of operations of the ESRB and three supervisory authorities: the
European Banking Authority (EBA), the European Securities and Markets
Authority, and the European Insurance and Occupational Pensions
Authority.
The new framework marks a significant transfer of power to the three
supervisory authorities, particularly with respect to detailed rule-making,
where over time they will be issuing “binding technical standards” across
arange of policy areas that will replace national rules.
However, an early preoccupation of the new regulatory authorities was
the eurozone crisis. In particular, the EBA was heavily engaged in
overseeing the stress testing of EU banks, including UK groups.
*unaudited
Business review Risk and balance sheet management continued