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Notes on the consolidated accounts
432
11 Financial instruments - valuation continued
2012 2012 2011 2011
Carrying value Fair value Carrying value Fair value
£bn £bn £bn £bn
Financial assets
Cash and balances at central banks 79.3 79.3 79.3 79.3
Loans and advances to banks 17.3 17.3 28.3 28.2
Loans and advances to customers 405.1 385.4 436.2 406.3
Debt securities 4.5 4.0 6.1 5.5
Settlement balances 5.7 5.7 7.8 7.8
Financial liabilities
Deposits by banks 34.5 34.5 51.3 50.7
Customer accounts 420.7 421.0 417.5 417.6
Debt securities in issue 60.1 59.8 115.4 112.7
Settlement balances 5.9 5.9 7.5 7.5
Notes in circulation 1.7 1.7 1.7 1.7
Subordinated liabilities 25.6 24.3 25.4 19.2
The fair value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants
at the measurement date. Quoted market values are used where
available; otherwise, fair values have been estimated based on
discounted expected future cash flows and other valuation techniques.
These techniques involve uncertainties and require assumptions and
judgments covering prepayments, credit risk and discount rates.
Furthermore there is a wide range of potential valuation techniques.
Changes in these assumptions would significantly affect estimated fair
values. The fair values reported would not necessarily be realised in an
immediate sale or settlement.
The fair values of intangible assets, such as core deposits, credit card
and other customer relationships are not included in the calculation of
these fair values as they are not financial instruments.
The assumptions and methodologies underlying the calculation of fair
values of financial instruments at the balance sheet date are as follows:
For certain short-term financial instruments: cash and balances at central
banks, items in the course of collection from other banks, settlement
balances, items in the course of transmission to other banks, customer
demand deposits and notes in circulation, fair value approximates to
carrying value.
Loans and advances to banks and customers
In estimating the fair value of loans and advances to banks and
customers measured at amortised cost, the Group’s loans are
segregated into appropriate portfolios reflecting the characteristics of the
constituent loans. Two principal methods are used to estimate fair value:
(a) Contractual cash flows are discounted using a market discount rate
that incorporates the current spread for the borrower or where this is
not observable, the spread for borrowers of a similar credit standing.
This method is used for portfolios where counterparties have external
ratings: large corporate loans in UK Corporate and institutional and
corporate lending in International Banking and Markets.
(b) Expected cash flows (unadjusted for credit losses) are discounted at
the current offer rate for the same or similar products. This approach
is adopted for lending portfolios in UK Retail, Ulster Bank, US Retail
& Commercial and Wealth and SME loans in UK Corporate reflecting
the homogeneous nature of these portfolios.
For certain portfolios where there are very few or no recent transactions,
such as Ulster Bank’s portfolio of lifetime tracker mortgages, a bespoke
approach is used based on available market data.
Debt securities
Fair values are determined using discounted cash flow valuation
techniques.
Deposits by banks and customer accounts
Fair values of deposits are estimated using discounted cash flow
valuation techniques.
Debt securities in issue and subordinated liabilities
Fair values are determined using quoted prices where available or by
reference to valuation techniques, adjusting for own credit spreads where
appropriate.