RBS 2012 Annual Report Download - page 137

RBS GROUP 2012
135
Flow statement
The table below analyses the movement in credit risk, market risk and operational risk RWAs by key drivers during the year.
Credit risk
Non-counterparty Counterparty
Market
risk
Operational
risk
Gross
RWAs
£bn £bn £bn £bn £bn
At 1 January 2012 344.3 61.9 64.0 37.9 508.1
Business and market movements (1) (46.0)(20.4)(16.3) 7.9 (74.8)
Disposals (7.3)(3.8)(6.5) — (17.6)
Model changes (2) 32.2 10.3 1.4 — 43.9
At 31 December 2012 323.2 48.0 42.6 45.8 459.6
Notes:
(1) Represents changes in book size, composition, position changes and market movements.
(2) Refers to implementation of a new model or modification of an existing model after approval from the FSA.
Key Points
x The £75 billion decrease due to business and market movements is
driven by:
- Market risk and counterparty risk decreased by £16 billion and £20
billion due to reshaping the business risk profile;
- Run-off of balances in Non-Core;
- Declines in Retail and Commercial due to loans migrating into
default and customer deleveraging; and
- Reduction in credit risk in the Group liquidity portfolio as European
peripheral exposures were sold.
x The increase in operational risk follows the recalibration based on
the average of the previous three years financial results. The
substantial losses recorded in 2008 no longer feature in the
calculation.
x Disposals of £18 billion relate to Non-Core disposals, including RBS
Aviation Capital and exposures relating to credit derivative product
companies, monolines and other counterparties.
x Model changes of £44 billion reflect:
- Changes to credit metrics applying to corporate, bank and
sovereign exposures as models were updated to reflect more
recent experience, £30 billion; and
- Application, of slotting approach to UK commercial real estate
exposures, £12 billion.
Looking forward
Basel III*
The rules issued by the Basel Committee on Banking Supervision
(BCBS), commonly referred to as Basel III, are a comprehensive set of
reforms designed to strengthen the regulation, supervision, risk and
liquidity management of the banking sector.
In December 2010, the BCBS issued the final text of the Basel III rules,
providing details of the global standards agreed by the Group of
Governors and Heads of Supervision, the oversight body of the BCBS
and endorsed by the G20 leaders at their November 2010 Seoul summit.
The new capital requirements regulation and capital requirements
directive that implement Basel III proposals within the European Union
(EU) (collectively known as CRD IV) are in two parts, Capital
Requirements Directive (CRD) and the Capital Requirements Regulation.
Further technical detail will be provided by the European Banking
Authority through its Implementing Technical Standards and Regulatory
Technical Standards.
The CRD IV has not yet been finalised and consequently the Basel III
implementation date of 1 January 2013 has been missed. While it is
anticipated that agreement of the CRD IV will be achieved during 2013,
the implementation date remains uncertain.
CRD IV and Basel III will impose a minimum common equity Tier 1
(CET1) ratio of 4.5% of RWAs. There are three buffers which will affect
the Group: the capital conservation buffer(1); the counter-cyclical capital
buffer(2) (up to 2.5% of RWAs), to be applied when macro-economic
conditions indicate areas of the economy are over-heating; and the
Global-Systemically Important Bank (G-SIB) buffer(3), leading to an
additional common equity Tier 1 requirement of 4% and a total common
equity Tier 1 ratio of 8.5%. The regulatory target capital requirements will
be phased in and are expected to apply in full from 1 January 2019.
Notes:
(1) The capital conservation buffer is set at 2.5% of RWAs and is intended to be available in periods of stress. Drawing on the buffer would lead to a corresponding reduction in the ability to make
discretionary payments such as dividends and variable compensation.
(2) The counter-cyclical buffer is institution specific and depends on the Group's geographical footprint and the macroeconomic conditions pertaining in the individual countries in which the Group
operates. As there is a time lag involved in determining this ratio, it has been assumed that it will be zero for the time being.
(3) The G-SIB buffer is dependent on the regulatory assessment of the Group. The Group has been provisionally assessed as requiring additional CET1 of 1.5% in the list published by the Financial
Stability Board (FSB) on 1 November 2012. The FSB list is updated annually. The actual requirement will be phased in from 2016, initially for those banks identified (in the list) as G-SIBs in
November 2014.
*unaudited