RBS 2011 Annual Report Download - page 460

458 RBS Group 2011
Risk factors continued
In November 2011, the Basel Committee proposed that global
systemically important banks be subject to an additional common equity
Tier 1 capital requirement ranging from 1-2.5%, depending on a bank’s
systemic importance. To provide a disincentive for banks facing the
highest charge to increase materially their global systemic importance in
the future, an additional 1% surcharge would be applied in such
circumstances.
On 4 November 2011 the Financial Stability Board published its policy
framework for addressing the systemic risks associated with global
systemically important financial institutions (GSIFI). In this paper the
Group was identified as a GSIFI. As a result the Group will be required to
meet resolution planning requirements by the end of 2012 as well as
have additional loss absorption capacity of 2.5% of risk-weighted assets
which will need to be met with common equity. In addition, GSIFIs are to
be subjected to more intensive and effective supervision. The additional
capital requirements are to be applied to GSIFIs identified in 2014 (the
Financial Stability Board will update its list every three years) and phased
in beginning in 2016.
The implementation of the Basel III reforms will begin on 1 January 2013;
however, the requirements are subject to a series of transitional
arrangements and will be phased in over a period of time, to be fully
effective by 2019.
The Basel III rules have not yet been approved by the EU and their
incorporation into European and national law has, accordingly, not yet
taken place. On 20 July 2011, the European Commission published a
legislative package of proposals (known as CRD IV) to implement the
changes through the replacement of the existing Capital Requirements
Directive with a new Directive and Regulation. As with Basel III, the
proposals contemplate the entry into force of the new legislation from 1
January 2013, with full implementation by 1 January 2019; however the
proposals allow the UK to implement the stricter definition and/or level of
capital more quickly than is envisaged under Basel III.
The ICB recommendations and the UK Government’s response
supporting such recommendations includes proposals to increase capital
and loss absorbency to levels that exceed the proposals under Basel
III/CRD IV. These requirements, as well as the other recommendations of
the ICB, are expected to be phased in between 2015 and 2019. As the
implementation of the ICB recommendations will be the subject of
legislation not yet adopted, the Group cannot predict the impact such
rules will have on the Group’s overall capital requirements or how they
will affect the Group’s compliance with capital and loss absorbency
requirements of Basel III/CRD IV.
To the extent the Group has estimated the indicative impact that Basel III
reforms may have on its risk-weighted assets and capital ratios, such
estimates are preliminary and subject to uncertainties and may change.
In particular, the estimates assume mitigating actions will be taken by the
Group (such as deleveraging of legacy positions and securitisations,
including non-core, as well as other actions being taken to de-risk market
and counterparty exposures), which may not occur as anticipated, in a
timely manner, or at all.
The Basel Committee changes and other future changes to capital
adequacy and liquidity requirements in the UK and in other jurisdictions in
which the Group operates, including any application of increasingly
stringent stress case scenarios by the regulators in the UK, the US and
other jurisdictions in which the Group undertakes regulated activities,
may require the Group to raise additional Tier 1 (including Core Tier 1)
and Tier 2 capital by way of further issuances of securities, and will result
in existing Tier 1 and Tier 2 securities issued by the Group ceasing to
count towards the Group’s regulatory capital, either at the same level as
present or at all. The requirement to raise additional Core Tier 1 capital
could have a number of negative consequences for the Group and its
shareholders, including impairing the Group’s ability to pay dividends on
or make other distributions in respect of ordinary shares and diluting the
ownership of existing shareholders of the Group. If the Group is unable to
raise the requisite Tier 1 and Tier 2 capital, it may be required to further
reduce the amount of its risk-weighted assets and engage in the disposal
of core and other non-core businesses, which may not occur on a timely
basis or achieve prices which would otherwise be attractive to the Group.
In addition, pursuant to the State Aid approval, should the Group’s Core
Tier 1 capital ratio decline to below 5% at any time before 31 December
2014, or should the Group fall short of its funded balance sheet target
level (after adjustments) for 31 December 2013 by £30 billion or more,
the Group will be required to reduce its risk-weighted assets by a further
£60 billion in excess of its plan through further disposals of identifiable
businesses and their associated assets.
Pursuant to the acquisition and contingent capital agreement entered into
between the Royal Bank and HM Treasury on 29 November 2009, the
Group will also be subject to restrictions on payments on its hybrid capital
instruments should its Core Tier 1 ratio fall below 6% or if it would fall
below 6% as a result of such payment. At 31 December 2011, the
Group’s Tier 1 and Core Tier 1 capital ratios were 13.0% and 10.6%,
respectively, calculated in accordance with FSA requirements. Any
change that limits the Group’s ability to manage effectively its balance
sheet and capital resources going forward (including, for example,
reductions in profits and retained earnings as a result of write-downs or
otherwise, increases in risk-weighted assets, delays in the disposal of
certain assets or the inability to syndicate loans as a result of market
conditions, a growth in unfunded pension exposures or otherwise) or to
access funding sources, could have a material adverse impact on its
financial condition and regulatory capital position or result in a loss of
value of its securities.
Additional information continued