RBS 2013 Annual Report Download - page 162
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Business review
160
RBS Capital Resolution
Background
In June 2013, in response to a recommendation by the Parliamentary
Commission on Banking Standards, the UK Government announced it
would review the case for an external ‘bad bank’, based on three
objectives as originally outlined by the Chancellor:
• accelerating the return of RBS to the private sector;
• supporting the British economy; and
• best value for the taxpayer.
Following this announcement, RBS worked closely with HM Treasury
(‘HMT’) and its advisers to identify a pool of assets with particularly high
long-term capital intensity, credit risk, low returns and/or potential stress
loss in varying scenarios. The balance of this identified pool was £47
billion as at 30 June 2013. The pool was forecast to be c.£38 billion of
assets as at 31 December 2013, which together with derivatives were
forecast to attract c.£116 billion of RWA equivalents(1).
HMT published its report on 1 November 2013. The review concluded
that the effort, risk and expense involved in the creation of an external
bad bank could not be justified. It also concluded that “RBS’s existing
provisions and levels of capital deducted suggested that projected future
losses are appropriately covered”.
As a result, and in line with its new strategic direction set out on 1
November 2013, RBS announced the creation of RBS Capital Resolution
(‘RCR’) to separate and wind down RBS’s high capital intensive assets.
RCR will bring assets under common management and was established
with the following principles:
• removing risk from the balance sheet in an efficient, expedient and
economic manner;
• reducing the volatile outcomes in stressed environments; and
• accelerating the release of capital through management and exit of
the portfolio.
The RCR division created with effect from 1 January 2014 is of a similar
size to the ex Non-Core division, but the assets were selected on a
different basis and no direct comparisons should be drawn. RCR assets
were selected on the basis of long term capital intensity whereas the
Non-Core assets were selected based on five strategic tests.
Going forward, as part of its external reporting, the Group will provide
comprehensive and transparent disclosures on the progress of RCR,
including funding and capital employed and released. Furthermore, a
Board Oversight Committee (‘BOC’) has been set up reporting directly to
the Group Board, to report on adherence to asset management principles
and recommend changes to strategy where appropriate. The BOC
comprises a quorum of any two of the Chairman of the Group Board, the
Senior Independent Director, the Chair of the Group Audit Committee and
the Chair of the Board Risk Committee.
While there are inevitable uncertain market and execution risks
associated with running down such assets, it is RBSs aspiration, subject
to shareholder value, to remove most of these assets and capital from the
balance sheet in three years. RCR will target a reduction in funded assets
to c.£23 billion by the end of 2014; to between £15 billion and £11 billion
by the end of 2015 and to less than £6 billion by the end of 2016. RCR is
expected to be Common Equity Tier 1 (‘CET1’) accretive over its life and
is neutral for shareholder value, taking into account future regulatory
capital requirements.
The RCR pool of assets was forecast to be c.£38 billion and c.£116
billion RWAe at its inception on 1 January 2014 based on 30 June 2013
data. Since this forecast was made:
• £4.6 billion of impairments and other adjustments were recorded in
respect of non-performing and other assets as a result of the change
in realisation strategy noted above, with capital impact of £37 billion
RWAe. The increased impairments relate to certain of the impaired
or non-performing assets transferred to RCR, and reflect the revised
holding strategy which has led to adverse changes in our estimates
of future cash flows.
• there were materially higher levels of disposal activity and
recoveries (£5 billion) in Non-Core than had been forecast based on
30 June 2013 data, with a capital impact of £14 billion reduction in
RWAe.
In aggregate, these two factors reduced the opening funded assets by £9
billion to £29 billion and RWAe by £51 billion to £65 billion. This reduction
is funded assets in the second half of the year, particularly the disposals,
has also resulted in a corresponding decrease in the Group’s funding
requirements.
At 1 January 2014, 48% of the portfolio’s funded assets are from Non-
Core (excluding Ulster Bank), 17% from Ulster Bank (Core and Non-
Core) and the remainder are from UK Corporate, International Banking
and Markets.
£12 billion of assets with RWAe of £11 billion managed by Non-Core
have been returned to the relevant Core divisions because they did not
meet the risk and capital criteria for RCR.
RCR commenced on 1 January 2014 and its first results will be reported
separately in the Group’s first quarter 2014 results.
Note:
(1) RWA equivalent (RWAe) is an internal metric that measures the equity capital employed in
divisions. RWAe converts both performing and non-performing exposures into a consistent
capital measure, being the sum of the regulatory RWAs and the regulatory capital
deductions, the latter converted to RWAe by applying a multiplier. The Group applies a CET
1 ratio of 10%, consistent with that used for divisional return on equity measure; this results in
an FLB3 RWAe conversion multiplier of 10.