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Notes on the consolidated accounts
422
11 Financial instruments - valuation continued
Valuation techniques
The table below shows a breakdown of valuation techniques and the ranges for those unobservable inputs used in valuation models and techniques that
have a material impact on the valuation of Level 3 financial instruments. The table excludes unobservable inputs where the impact on valuation is less
significant. Movements in the underlying input may have a favourable or unfavourable impact on the valuation depending on the particular terms of the
contract and the exposure. For example an increase in the credit spread of a bond would be favourable for the issuer and unfavourable for the note
holder. Whilst we indicate where we consider that there are significant relationships between the inputs, these inter-relationships will be affected by
macro economic factors including interest rates, foreign exchange rates or equity index levels.
Level 3 (£bn) Range
Financial instruments
A
ssets Liabilities Valuation technique Unobservable inputs Lo
w
High
Loans 0.5 0.2 Price based Price (2) 80% 100%
Discounted cash flow model (DCF) Credit spreads (3) 0bps 831bps
Recovery rates (4) 10% 67%
Yield (2) 8% 24%
Probability of default (5) 5% 20%
Deposits 0.1 Option pricing Volatility (6) 27% 30%
Debt securities
RMBS 0.3 Price based Price (2) 0% 96%
DCF Probability of default (5) 2% 7%
Conditional prepayment rates (CPR) (7) 0% 7%
Yield (2) 6% 19%
CDO and CLO 1.1 Price based Price (2) 0% 100%
DCF Yield (2) 10% 29%
Probability of default (5) 2% 11%
Other ABS 0.3 Price based Price (2) 0% 100%
Other debt securities 0.4 DCF Credit spreads (3) 99bps 140bps
Price based Price (2) 68% 100%
Equity securities 0.7 Price based Price (2) 69% 158%
EBITDA multiple EBITDA multiple (8) 1x 40x
DCF Yield 47% 64%
Recovery rates (4) 0% 40%
Derivatives
Foreign exchange 1.3 0.7 DCF Correlation (9) (55%) 100%
Option pricing model Volatility (6) 6% 26%
Interest rate 1.4 0.6 Option pricing model Correlation (9) (55%) 100%
DCF CPR (7) 2% 20%
Equities and commodities 0.8 Option pricing model Volatility (6) 16% 40%
Credit 0.8 0.9 Price based Price (2) 0% 100%
DCF based on defaults and recoveries Recovery rates (4) 0% 100%
Upfront points (10) 2% 100%
Credit spreads (3) 35bps 725bps
For the notes to this table refer to the following page.