RBS 2012 Annual Report Download - page 397

RBS GROUP 2012
395
Valuation reserves
When valuing financial instruments in the trading book, adjustments are made to mid-market valuations to cover bid-offer spread, liquidity and credit
risk. The following table shows credit valuation adjustments and other reserves.
Credit valuation adjustments
Valuation adjustments represent an estimate of the adjustment to fair value that a market participant would make to incorporate the risk inherent in
derivative exposures. Certain credit derivative product company (CDPC) exposures were restructured during the first half of the year and the credit
valuation adjustment methodology applied to these exposures was updated to reflect the revised risk mitigation strategy that is now in place. There were
no other changes to valuation methodologies.
2012
£m
2011
£m
2010
£m
Credit valuation adjustments (CVA)
- monoline insurers 192 1,198 2,443
- credit derivative product companies 314 1,034 490
- other counterparties 2,308 2,254 1,714
2,814 4,486 4,647
Bid-offer, liquidity, funding, valuation and other reserves (1) 1,997 2,704 2,797
Valuation reserves 4,811 7,190 7,444
Note:
(1) Includes bid-offer reserves of £625 million (2011 - £806 million), funding valuation adjustment of £475 million (2011 - £552 million), product and deal specific reserves of £763 million (2011 - £1,040
million), valuation basis reserves of £103 million (2011 - £253 million) and other reserves of £31 million (2011 - £53 million).
Key points
x Restructuring of certain monoline exposures resulted in gross
exposure reducing from £1.9 billion at 31 December 2011 to £0.6
billion at 31 December 2012 and the CVA decreasing. Tighter credit
spreads also contributed to the reduction in credit valuation
adjustments.
x CDPCs gross exposure decreased by £1.3 billion from £1.9 billion in
December 2011 to £0.6 billion at 31 December 2012. This was
primarily driven by tighter credit spreads of the underlying reference
loans and bonds together with a decrease in the relative value of
senior tranches compared with the underlying reference portfolio
and the impact of restructuring certain exposures in the first half of
the year. The valuation adjustment, incorporating transactions and
related risk mitigation strategies that are now in place, decreased on
an absolute basis in line with the decrease in exposure while
remaining stable on a relative basis.
x The increase in credit valuation adjustment held against exposure to
other counterparties was driven by the impact of counterparty rating
downgrades and an increase in sector specific reserves, partially
offset by tighter credit spreads.
x Within other reserves, bid-offer reserves decreased, primarily
reflecting restructuring in the second half of 2012, due to risk
reduction and the impact of Greek government debt restructuring.