RBS 2011 Annual Report Download - page 466

464 RBS Group 2011
Risk factors continued
The extensive governance, asset management and information
requirements under the Scheme Conditions may have an adverse impact
on the Group and the expected benefits of the APS
There are extensive governance, asset management and information
requirements under the Scheme Conditions in relation to the Covered
Assets, other assets and the operations of the Group and HM Treasury
also has the right to require the appointment of one or more step-in
managers to exercise certain step-in rights in certain circumstances. The
step-in rights are extensive and include certain oversight, investigation,
approval and other rights, the right to require the modification or
replacement of any of the systems, controls, processes and practices of
the Group and extensive rights in relation to the direct management and
administration of the Covered Assets.
If HM Treasury seeks to exercise its right to appoint one or more step-in
managers in relation to the management and administration of Covered
Assets held by RBS Holdings N.V. or its wholly-owned subsidiaries, RBS
Holdings N.V. will, in certain circumstances, need to seek consent from
the Dutch Central Bank to allow it to comply with such step-in. If this
consent is not obtained by the date on which the step-in rights must be
effective, and other options to effect compliance are not possible, those
assets would need to be withdrawn by the Group from the APS where
possible. If the Group cannot withdraw such Covered Assets from the
APS, it would be likely to lose protection in respect of these assets under
the APS and/or may be liable under its indemnity to HM Treasury.
Additionally pursuant to the accession agreement between HM Treasury
and the Group relating to the accession to the APS, HM Treasury has the
right to require the Royal Bank to appoint one or more Special Advisers
(“SOC Special Advisers”) to exercise oversight functions over certain
assets in the APS. On 18 June 2010, the Asset Protection Agency
required that the Royal Bank appoint SOC Special Advisers in relation to
certain assets and business areas in order to provide additional support
to the Senior Oversight Committee of the Royal Bank. There have been
four such appointments to date granting certain oversight rights in relation
to certain specified assets and the work of each of the SOC Special
Advisers is now substantially completed.
The obligations of the Group and the rights of HM Treasury may,
individually or in the aggregate, impact the way the Group runs its
business and may serve to limit the Group’s operations with the result
that the Group’s business, results of operations and financial condition
will suffer. In addition, the market’s reaction to such controls and
limitations may have an adverse impact on the price of its securities.
Any changes to the expected regulatory capital treatment of the APS, the
BShares or the Contingent B Shares may have a material adverse
impact on the Group
One of the key objectives of the APS and the issuance of £25.5 billion of
BShares and, if required, the £8 billion Contingent B Shares was to
improve capital ratios at a consolidated level for the Group and at an
individual level for certain relevant Group members. In that context, the
Group has entered and may in the future enter into further back-to-back
arrangements with Group members holding assets or exposures to be
covered by the APS in order to ensure the capital ratios of these entities
are also improved by virtue of the APS. However, there is a risk that the
regulatory capital treatment applied by relevant regulators may differ from
that assumed by the Group in respect of the APS (including any back-to-
back arrangements), the treatment of the B Share issuance and the £8
billion Contingent B Shares (if required).
If participation in the APS and the issuance of £25.5 billion of B Shares
and, if required, the £8 billion Contingent B Shares are not sufficient to
maintain the Group’s capital ratios as expected, this could cause the
Group’s business, results of operations and financial condition to suffer,
its credit ratings to drop, its ability to lend and access to funding to be
further limited and its cost of funding to increase, and may result in
intervention by the Authorities, which could include full nationalisation or
other resolution procedures under the Banking Act as described above.
The occurrence of any or all of such events may cause the price of its
securities to decline.
If the Group is unable to issue the Contingent B Shares to HM Treasury,
it may have a material adverse impact on the Group’s capital position,
liquidity, operating results and future prospects
In the event that the Group’s Core Tier 1 capital ratio declines to below 5
per cent., HM Treasury is committed to subscribe for up to an additional
£8 billion of Contingent B Shares if certain conditions are met. If such
conditions are not met and are not waived by HM Treasury, and the
Group is unable to issue the Contingent B Shares, the Group will be
required to find alternative methods for achieving the requisite capital
ratios. There can be no assurance that any of these alternative methods
will be available or would be successful in increasing the Group’s capital
ratios to the desired or requisite levels. If the Group is unable to issue the
Contingent B Shares, the Group’s capital position, liquidity, operating
results and future prospects will suffer, its credit ratings may drop, its
ability to lend and access funding will be further limited and its cost of
funding may increase. The occurrence of any or all of such events may
cause the price of its securities to decline.
Additional information continued