RBS 2012 Annual Report Download - page 153

RBS GROUP 2012
151
Encumbrance
The Group reviews all assets against the criteria of being able to finance
them in a secured form (encumbrance) but certain asset types lend
themselves more readily to encumbrance. The typical characteristics that
support encumbrance are an ability to pledge those assets to another
counterparty or entity through operation of law without necessarily
requiring prior notification, homogeneity, predictable and measurable
cash flows, and a consistent and uniform underwriting and collection
process. Retail assets including residential mortgages, credit card
receivables and personal loans display many of these features.
From time to time the Group encumbers assets to serve as collateral to
support certain wholesale funding initiatives. The three principal forms of
encumbrance are own asset securitisations, covered bonds and
securities repurchase agreements. The Group categorises its assets into
three broad groups; assets that are:
x already encumbered and used to support funding currently in place
via own asset securitisations, covered bonds and securities
repurchase agreements.
x not currently encumbered but can for instance be used to access
funding from market counterparties or central bank facilities as part
of the Group’s contingency funding.
x not currently encumbered. In this category, the Group has in place
an enablement programme which seeks to identify assets which are
capable of being encumbered and to identify the actions to facilitate
such encumbrance whilst not impacting customer relationships or
servicing.
The Group’s encumbrance ratios are set out below.
2012 2011
Encumbrance ratios % %
Total 18 19
Excluding balances relating to derivative transactions 22 26
Excluding balances relating to derivative and securities financing transactions 13 19
Own-asset securitisations
The Group has a programme of own-asset securitisations where assets
are transferred to bankruptcy remote special purpose entities (SPEs)
funded by the issue of debt securities. The majority of the risks and
rewards of the portfolio are retained by the Group and these SPEs are
consolidated and all of the transferred assets retained on the Group’s
balance sheet. In some own-asset securitisations, the Group may
purchase all the issued securities which are available to be pledged as
collateral for repurchase agreements with major central banks. The
following table shows the asset categories together with the carrying
amounts of the assets and associated liabilities, for both own-asset
securitisations where the debt securities issued are held by third parties
and those where the debt securities issued are held by the Group.
Covered bond programme
Certain loans and advances to customers have been assigned to
bankruptcy remote limited liability partnerships to provide security for
issues of covered bonds by the Group. The Group retains all of the risks
and rewards associated with these loans, the partnerships are
consolidated, the loans retained on the Group’s balance sheet and the
related covered bonds in issue included within debt securities in issue.
The following table shows the asset categories and the carrying amounts
of those assets and of the covered bonds issued.
Securities repurchase agreements and lending transactions
The Group enters into securities repurchase agreements and securities
lending transactions (repos) under which it transfers securities in
accordance with normal market practice. Generally, the agreements
require additional collateral to be provided if the value of the securities
falls below a predetermined level. Under standard terms for repurchase
transactions in the UK and US markets, the recipient of collateral has an
unrestricted right to sell or repledge it, subject to returning equivalent
securities on settlement of the transaction. Securities sold under
repurchase transactions are not derecognised if the Group retains
substantially all the risks and rewards of ownership. The fair value (which
is equivalent to the carrying value) of securities transferred under such
repurchase transactions included within debt securities on the balance
sheet are set out below. All of these securities could be sold or repledged
by the holder.