RBS 2011 Annual Report Download - page 351

RBS Group 2011 349
Own credit
The Group takes into account the effect of its own credit standing when
valuing financial liabilities recorded at fair value in accordance with IFRS.
Own credit spread adjustments are made to issued debt held at fair
value, including issued structured notes, and derivatives. An own credit
adjustment is applied to positions where it is believed that counterparties
would consider the Group's creditworthiness when pricing trades.
For issued debt and structured notes this adjustment is based on debt
issuance spreads above average inter-bank rates (at a range of tenors).
At the beginning of the year the spreads were based on levels which the
market would demand when purchasing new senior or sub-debt
issuances from the Group. During the year, primary debt issuance activity
in the market reduced whilst liquidity remained in the secondary trading of
Group senior debt. These secondary senior debt issuance spreads were
considered to provide a more accurate reflection of fair value and these
levels are therefore now used in the calculation of the own credit
adjustment applied to senior debt. Where necessary, these quotes are
interpolated using a curve shape derived from credit default swap prices.
The fair value of the Group's derivative financial liabilities has also been
adjusted to reflect the Group's own credit risk. The adjustment takes into
account collateral posted by it and the effects of master netting
agreements.
The own credit adjustment for fair value does not alter cash flows, is not
used for performance management, is disregarded for regulatory capital
reporting processes and will reverse over time as the liabilities mature.
The reserve movement between periods will not equate to the reported
profit or loss for own credit. The balance sheet reserves are stated by
conversion of underlying currency balances at spot rates for each period
whereas the income statement includes intra-period foreign exchange
sell-offs.
The effect of change in credit spreads could be reversed in future
periods, provided the liability is not repaid at a premium or a discount.
The following table shows own credit adjustments on own liabilities.
Debt securities in issue (1)
Cumulative own credit adjustment HFT
£m
DFV (2)
£m
Total
£m
Subordinated
liabilities
DFV (2)
£m
Total
£m
Derivatives
£m
Total
£m
2011 882 2,647 3,529 679 4,208 602 4,810
2010 517 1,574 2,091 325 2,416 534 2,950
2009 548 1,309 1,857 474 2,331 467 2,798
Carrying values of underlying liabilities £bn £bn £bn £bn £bn
2011 11.5 35.7 47.2 0.9 48.1
2010 7.7 43.5 51.2 1.1 52.3
2009 4.0 41.5 45.5 1.3 46.8
Notes:
(1) Consists of wholesale and retail note issuances.
(2) Designated as at fair value through profit and loss.