RBS 2012 Annual Report Download - page 404

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Notes on the consolidated accounts continued
11 Financial instruments - valuation continued
Level 3 valuation assumptions
Assets Valuation basis/technique Main assumptions
(2)
Loans and advances Proprietary model credit spreads, indices
Debt securities
RMBS Industry standard model prepayment rates, probability of default, loss severity and yield, recovery rates
CMBS Proprietary model prepayment rates, probability of default, loss severity and yield, recovery rates
CDO Proprietary model credit spreads, default rates, housing prices, implied collateral valuation
CLO Industry standard simulation model credit spreads, default rates, loss severity and yield, recovery rates
Other ABS Proprietary model credit spreads
Other debt securities Proprietary model credit spreads
Equity securities Fund valuation statements,
fundamentals valuation
performance of funds and issuers
Derivatives
Foreign exchange Proprietary model correlation, volatility
Interest rate Proprietary model correlation, volatility
Equities and commodities Proprietary model correlation, long dated volatility, dividends
Credit Proprietary CVA model, industry
option and correlation model
correlation, counterparty credit risk, volatility
Liabilities
Customer accounts Proprietary model correlation, credit spreads
Debt securities in issue Proprietary model correlation, volatility, model uncertainty risk
Short positions Proprietary model correlation, credit spreads
Derivatives
Foreign exchange Proprietary model correlation, volatility
Interest rate Proprietary model correlation, volatility
Equities and commodities Proprietary model correlation, long dated volatility, dividends
Credit Proprietary CVA model, industry
option and correlation model
correlation, counterparty credit risk, volatility
Notes:
(1) Sensitivity represents the favourable and unfavourable effect on the income statement or the statement of comprehensive income due to reasonably possible changes to valuations using reasonably
possible alternative inputs to the Group's valuation techniques or models. Totals for sensitivities are not indicative of the total potential effect on the income statement or the statement of
comprehensive income.
(2) Includes model uncertainty risk.
Key points
x Total assets carried at fair value decreased by £130.4 billion in the
year to £751.8 billion at 31 December 2012, principally reflecting
decreases in derivative assets (£87.7 billion), debt securities (£50.0
billion) and derivative collateral (£6.4 billion), partially offset by
increases in reverse repos (£15.1 billion).
x Total liabilities carried at fair value decreased by £91.0 billion, with
decreases in derivative liabilities (£89.7 billion), short positions
(£13.4 billion), debt securities in issue (£12.7 billion) and collateral
(£4.4 billion), partially offset by increases in repos (£29.8 billion).
x Level 3 instruments in Markets comprise instruments held in the
normal course of business and those in Non-Core primarily relate to
legacy ABS and derivative positions.
x Level 3 assets of £10.4 billion represented 1.4% of the total (2011 -
£16.4 billion and 1.9%), a decrease of £6.0 billion (derivatives £2.9
billion and debt securities £3.1 billion). This reflected transfers from
level 3 to level 2 of £1.1 billion as well as maturity and sale of
instruments, particularly securities in Non-Core. These transfers
from level 3 were based on the re-assessment of the impact and
nature of unobservable inputs used in valuation models. £1.6 billion
was transferred from level 2 to level 3, principally relating to
securities of £1 billion, primarily ABS in Non-Core Markets and
certain derivatives £0.4 billion.
x Level 3 liabilities decreased by £1.4 billion during the year to £4.9
billion primarily due to buy-back and maturity of instruments.
x The favourable and unfavourable effects of reasonably possible
alternative assumptions on level 3 instruments carried at fair value
were £1.0 billion (2011 - £1.7 billion) and £(0.7) billion (2011 - £(1.0)
billion) respectively.
x There were no significant transfers between level 1 and level 2.