RBS 2012 Annual Report Download - page 287

RBS GROUP 2012
285
Regulatory risk*
Regulatory risk is the risk of material loss or liability, legal or regulatory
sanctions, or reputational damage, arising from the failure to comply with
(or adequately plan for changes to) relevant official sector policy, laws,
regulations, or major industry standards, in any location in which the
Group operates. The Group believes that maintaining a strong regulatory
risk framework is fundamental to protecting sustainable growth, rebuilding
its reputation and maintaining stakeholder confidence.
The regulatory environment remained highly challenging during 2012, as
policymakers and regulators continued to strengthen regulation and
supervision in response to the events of 2007/2008 and subsequent
economic and financial stress.
The regulatory agenda, largely framed by the G20 but with many
instances of European Union (EU) and national initiatives, constitutes the
most sweeping set of changes seen in many decades. At 31 December
2012, the Group was managing some 105 major regulatory or legislative
policy initiatives. During the year as a whole, it had also reviewed over
320 consultations in its core markets. In addition to these changes, many
supervisory authorities also continued to intensify their ongoing level of
scrutiny and intervention.
These trends have posed multiple challenges for banking groups,
including the Group, namely:
x tracking, analysing and engaging with policymakers on proposed
changes;
x implementing change programmes to ensure compliance with new
requirements;
x revisiting strategy, business and operating models in response to
the new environment; and
x driving through cultural and other changes to promote good
business practice and to minimise enforcement risks.
Global regulatory developments
The global agenda continues to be guided by the G20, drawing on the
original action plan for strengthening financial stability agreed by G20
leaders at the November 2008 Washington summit. Although policy
initiation at the G20 level is drawing to an end, a substantial pipeline of
policy development remains in train and the Group does not anticipate
any easing of this for some time. During 2012, G20 countries continued
to implement various elements of this action plan, and further endorsed it
at the G20 leaders’ summit held in Los Cabos, Mexico in June 2012 and
the finance ministers’ and central bank governors’ meetings, most
recently in Mexico City in November 2012.
Key developments during 2012 included the following:
Basel III
Following publication by the Basel Committee on Banking Supervision in
December 2010 of rules for the new Basel III capital and liquidity
framework, work during 2012 focused on finalising the remaining
elements of policy and preparing for implementation. Highlights were:
x Publication of results of the Basel III monitoring exercise at 30 June
2011 (published April 2012) and at 31 December 2011 (published
September 2012). The latest results (which ignore the transitional
provisions which apply) showed good progress, with an average
Common Equity Tier 1 ratio of 7.7% across 102 banks with Tier 1
capital above €3 billion. This compares to an effective target of 7%.
However, individual bank shortfalls, including surcharges for
systemically important banks where applicable, still totalled €374
billion;
x The finalisation of rules for composition of capital disclosure
requirements (June 2012);
x Proposals for monitoring indicators for intra-day liquidity
management (July 2012);
x Interim rules for the capitalisation of bank exposures to central
counterparties (July 2012);
x Final rules for the regulatory treatment of valuation adjustments to
derivative liabilities (July 2012); and
x Final rules amending the liquidity coverage ratio (LCR), including
revised definitions of high quality liquid assets and net cash outflows.
The LCR will now be phased in from 2015 to 2019 and it was also
re-confirmed that a stock of liquid assets would be available for use
by banks in stress situations (January 2013).
The Basel Committee also turned its attention increasingly to
developments beyond Basel III. In particular, it published an initial
consultation paper to launch its fundamental review of the trading book
(May 2012). Here, the Committee is seeking to improve the coherence of
market risk capital requirements and to enhance the consistency of
implementation across jurisdictions and convergence of requirements
across the industry.
Systemic financial institutions
With the G20-mandated target of agreeing a framework for dealing with
global systemically important financial institutions having been met in
2011, much work in 2012 was at the EU level, with discussions on
incorporating a general approach into CRD IV.
Separately, and following consultation, the Basel Committee published a
framework to address domestic systemically important banks in
November 2012, which followed on from its methodology for identifying
global systemically important banks developed in 2011. The framework
focuses on the impact that the distress or failure of banks will have on the
domestic economy. The correct calibration of linkages between the
domestic and international frameworks is now critical.
*unaudited