RBS 2011 Annual Report Download - page 457

RBS Group 2011 455
The Group and its UK bank subsidiaries may face the risk of full
nationalisation or other resolution procedures under the Banking Act
2009 which may result in various actions being taken in relation to any
securities
Under the Banking Act 2009, substantial powers have been granted to
HM Treasury, the Bank of England and the FSA (together, the
“Authorities”) as part of a special resolution regime. These powers enable
the Authorities to deal with and stabilise UK incorporated institutions with
permission to accept deposits pursuant to Part IV of the FSMA that are
failing, or are likely to fail, to satisfy the threshold conditions (within the
meaning of section 41 of the FSMA, which are the conditions that a
relevant entity must satisfy in order to obtain its authorisation to perform
regulated activities). The special resolution regime consists of three
stabilisation options: (i) transfer of all or part of the business of the
relevant entity and/or the securities of the relevant entity to a private
sector purchaser; (ii) transfer of all or part of the business of the relevant
entity to a “bridge bank” wholly-owned by the Bank of England; and (iii)
temporary public ownership (nationalisation) of the relevant entity. HM
Treasury may also take a holding company of the relevant entity into
temporary public ownership where certain conditions are met. The
Banking Act also provides for two new insolvency and administration
procedures for relevant entities. Certain ancillary powers include the
power to modify (including imposing additional obligations) and cancel
certain contractual arrangements in certain circumstances.
If HM Treasury decides to take the Group into temporary public
ownership pursuant to the powers granted under the Banking Act, it may
take various actions in relation to any securities without the consent of
holders of the securities. These could include: (i) transferring the
securities free from any trust, liability or other encumbrance and free from
any contractual, legislative or other restrictions on transfer; (ii)
extinguishing any rights to acquire securities; (iii) delisting the securities;
(iv) converting the securities into another form or class; or (v) disapplying
any termination or acceleration rights or events of default under the terms
of the securities which would be triggered by the transfer or certain
related events.
Where HM Treasury makes a share transfer order in respect of securities
issued by a holding company of a relevant entity, HM Treasury may make
an order providing for the property, rights or liabilities of the holding
company or of any relevant entity in the holding company group to be
transferred and where such property is held on trust, removing or altering
the terms of such trust.
Although the Banking Act includes provisions related to compensation in
respect of transfer instruments and orders made under it (including
securities that are transferred with respect to a relevant entity) there can
be no assurance that compensation would be assessed to be payable or
that any compensation would be recovered promptly and/or would equal
any loss actually incurred. HM Treasury is also empowered by order to
amend the law (including with retrospective effect) for the purpose of
enabling the powers under the special resolution regime to be used
effectively. In general, there is considerable uncertainty about the scope
of the powers afforded to the Authorities under the Banking Act and how
the Authorities may choose to exercise them. However, potential impacts
may include full nationalisation of the Group, the total loss of value of
securities and the inability of the Group to perform its obligations under its
securities.
The financial performance of the Group has been, and continues to be,
materially affected by deteriorations in borrower and counterparty credit
quality and further deteriorations could arise due to prevailing economic
and market conditions and legal and regulatory developments
The Group has exposure to many different industries and counterparties,
and risks arising from actual or perceived changes in credit quality and
the recoverability of monies due from borrowers and counterparties are
inherent in a wide range of the Group’s businesses. In particular, the
Group has significant exposure to certain individual counterparties in
weakened business sectors and geographic markets and also has
concentrated country exposure in the UK, the US and across the rest of
Europe (particularly Ireland) and within certain business sectors, namely
personal finance, financial institutions and commercial real estate. For a
discussion of the Group’s exposure to country risk see pages 208 to 228.
Furthermore, the Group expects its exposure to the UK to increase
proportionately as its business becomes more concentrated in the UK,
with exposures generally being reduced in other parts of its business as it
implements its strategy, including the reduction of, and exit from, certain
businesses in its GBM business.
The Group may continue to see adverse changes in the credit quality of
its borrowers and counterparties, for example as a result of their inability
to refinance their debts, with increasing delinquencies, defaults and
insolvencies across a range of sectors and in a number of geographic
markets. Since the credit quality of the Group’s borrowers and
counterparties is impacted by prevailing economic and market conditions
and by the legal and regulatory landscape in their respective markets, a
significant deterioration in economic and market conditions or changes to
legal or regulatory landscapes could worsen borrower and counterparty
credit quality and also impact the Group’s ability to enforce contractual
security rights. In addition, the Group’s credit risk is exacerbated when
the collateral it holds cannot be realised or is liquidated at prices not
sufficient to recover the full amount of the loan or derivative exposure that
is due to the Group, which is most likely to occur during periods of
illiquidity and depressed asset valuations, such as those experienced in
recent years. Any such losses could have an adverse effect on the
Group’s results of operations and financial condition or result in a loss of
value in its securities.