RBS 2012 Annual Report Download - page 138

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Business review Risk and balance sheet management continued
Capital management: Looking forward continued
The changes in the definition of regulatory capital under CRD IV and the
capital ratios will be subject to transitional rules:
x The increase in the minimum capital ratios and the new buffer
requirements will be phased in over the five years from
implementation of the CRD IV;
x The application of the regulatory deductions and adjustments at the
level of common equity, including the new deduction for deferred tax
assets, will also be phased in over the five years from
implementation; the current adjustment for unrealised gains and
losses on available-for-sale securities will be phased out; and
x Subordinated debt instruments which do not meet the new eligibility
criteria will be will be grandfathered on a reducing basis over ten
years.
The Group is well advanced in its preparations to comply with the new
requirements based on the draft rules. Given the phasing of both capital
requirements and target levels, in advance of needing to comply with the
fully loaded end state requirements, the Group will have the opportunity
to continue to generate additional capital from earnings and take
management actions to mitigate the impact of CRD IV.
The Group’s pro forma Core Tier 1 ratio on a fully loaded basis at 31
December 2012, based on its interpretation of the rules and assuming
they were applied today, is estimated at 7.7%(1). The pro forma capital
ratio reflects the Group’s interpretation of the draft July 2011 CRD IV
rules and how these rules are expected to be updated for subsequent EU
and Basel pronouncements.
The actual impact of CRD IV on capital ratios may be materially different
as the requirements and related technical standards have not yet been
finalised and will ultimately be subject to application by local regulators.
The actual impact will also be dependent on required regulatory
approvals and the extent to which further management action is taken
prior to implementation.
Models changes
The Group, in conjunction with the FSA, regularly evaluates its models for
the assessment of RWAs ascribed to credit risk (including counterparty
risk) across various classes. This includes implementing changes to the
RWA requirements for commercial real estate portfolios consistent with
revised industry guidance from the FSA. The changes to RWA resulting
from model changes during 2012 have increased RWA requirements by
£44 billion of which £12 billion relates to property guidance. Further uplifts
are expected in 2013 totalling c.£10 billion to £15 billion.
Other regulatory capital changes*
The Group is managing the changes to capital requirements from new
regulation and model changes and the resulting impact on the common
equity Tier 1 ratio, focusing on risk reduction and deleveraging. This is
principally being achieved through the continued run-off and disposal of
Non-Core assets and deleveraging in Markets, as the business focuses
on the most productive returns on capital. Markets RWAs decreased by
£19 billion in 2012 which also lessens the increases driven by the
counterparty risk changes in CRD IV.
European Banking Authority (EBA) recommendation
The EBA issued a recommendation in 2011 that the national regulators
should ensure that credit institutions build up a temporary capital buffer to
reach a 9% Core Tier 1 ratio by 30 June 2012 (‘the recapitalisation of EU
banks’). In its final report on the recapitalisation exercise in October 2012,
the EBA stated that once the CRD IV is finally adopted, the 2011
recommendation would be replaced with a new recommendation. The
new recommendation will include the requirement for banks to maintain a
nominal amount of Core Tier 1 capital as defined by the EBA for the 2011
stress test and recapitalisation recommendation) corresponding to the
amount of 9% of the RWAs at 30 June 2012. The Group does not expect
the potential floor to become a limiting factor.
Note:
(1) Based on the following principal assumptions: (i) divestment of Direct Line Group (ii) deductions for financial holdings of less than 10% of common equity Tier 1 capital have been excluded pending
the finalisation of CRD IV rules (iii) RWA uplifts assume approval of all regulatory models and completion of planned management actions (iv) RWA uplifts include the impact of credit valuation
adjustments (CVA) and asset valuation correlation on banks and central clearing counterparties (v) EU corporates, pension funds and sovereigns are assumed to be exempt from CVA volatility
charge in calculating RWA impacts.
*unaudited