RBS 2013 Annual Report Download - page 530
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Additional information
528
Risk factors continued
The Group is subject to other global risks
By virtue of the Group’s global presence, the Group is exposed to risks
arising out of geopolitical events, such as the existence of trade barriers,
the implementation of exchange controls and other measures taken by
sovereign governments that can hinder economic or financial activity
levels. Furthermore, unfavourable political, military or diplomatic events,
armed conflict, pandemics and terrorist acts and threats, and the
response to them by governments could also adversely affect levels of
economic activity and have an adverse effect upon the Group’s business,
financial condition and results of operations.
The Group’s business performance could be adversely affected if its
capital is not managed effectively or as a result of changes to capital
adequacy and liquidity requirements
Effective management of the Group’s capital is critical to its ability to
operate its businesses, and to pursue its strategy of returning to
standalone strength. The Group is required by regulators in the UK, the
US and other jurisdictions in which it undertakes regulated activities to
maintain adequate capital resources. The maintenance of adequate
capital is also necessary for the Group’s financial flexibility in the face of
continuing turbulence and uncertainty in the global economy and
specifically in its core UK, US and European markets.
The Basel Committee on Banking Supervision’s package of reforms to
the regulatory capital framework raises the quantity and quality of capital
required to be held by a financial institution with an emphasis on
Common Equity Tier 1 (CET1) capital and introduces an additional
requirement for both a capital conservation buffer and a countercyclical
buffer to be met with CET1 capital. The Basel Committee also has
proposed that global systemically important banks (GSIBs) be subject to
an additional CET1 capital requirement, depending on a bank’s systemic
importance. The Group has been identified by the Financial Stability
Board (FSB) as a GSIB. The FSB list of GSIBs is updated annually,
based on new data and changes to methodology. The November 2013
update placed the Group in the second from bottom bucket of GSIBs,
subjecting it to more intensive oversight and supervision and requiring to
have additional loss absorption capacity of 1.5% in CET1, to be phased
in from the beginning of 2016.
The Basel III rules are dependent on local implementation. The EU
legislative package of proposals to implement the changes with a new
Directive and Regulation (collectively known as “CRD IV”) was finalised in
June 2013 paving the way for implementation of Basel III in the EU from
1 January 2014, subject to a number of transitional provisions and
clarifications. A number of the requirements introduced under CRD IV will
be further supplemented through the Regulatory and Implementing
Technical Standards (RTSs/ITSs) produced by the European Banking
Authority (EBA) which are not yet finalised. The EU rules deviate from the
Basel III rules in certain aspects (e.g. in imposing an additional systemic
risk buffer), and provide national flexibility to apply more stringent
prudential requirements than set in the EU (or Basel) framework.
Since 1 January 2014, the Group has been required to comply with the
requirements of CRD IV, the EBA’s RTSs and ITSs and the PRA’s Policy
Statement PS 7/13 (Strengthening capital standards: implementing CRD
IV, feedback and final rules). The Group must also operate by reference
to the capital and leverage requirements set out by the PRA in its
supervisory statement SS3/13 issued in November 2013 which is
applicable to the eight major UK banks and building societies.
The provisions of PS7/13 embody PRA requirements to accelerate the
introduction and phasing in of certain transitional provisions of CRD IV.
The policy statement also sets out the intent of the PRA in respect of
capital buffers as well as the approach to so-called Pillar 2 risks. By their
nature, Pillar 2A risks, which contribute to the scaling of the Group’s
Individual Capital Guidance from the PRA, can include risks which the
Group considers would only materialise at the point of non-viability, an
example being pension obligation risk. PS7/13 does not recognise this
distinction and requires that Pillar 2A risks are met by at least 56% of
CET1 by 1 January 2015.
The Banking Reform Act 2013, implementing the ICB recommendations,
will introduce mechanisms requiring systemically important UK banks and
building societies to hold loss-absorbing capacity, in addition to the
capital held to satisfy their capital requirements under CRD IV as
implemented by the PRA. These requirements, as well as other
recommendations of the ICB, are to be established through secondary
legislation and are expected to be phased in between 2015 and 2019.
The US Federal Reserve has also recently adopted new rules relating to
how it will regulate the US operations of foreign banking operations such
as the Group that may affect the capital requirements of the Group’s
operations in the US. As the implementation of the ICB recommendations
is the subject of secondary legislation not yet adopted and the Federal
Reserve has only recently adopted its final rules, the Group cannot
predict the impact such rules will have on the Group’s overall capital
requirements or how they will affect the Group’s compliance with
applicable capital and loss absorbency requirements.
To the extent the Group has estimated the indicative impact that CRD IV
rules may have on its risk-weighted assets and capital ratios, such
estimates are preliminary and subject to uncertainties and may change.
In particular, the estimates assume mitigating actions will be taken by the
Group (such as deleveraging of legacy positions and securitisations,
including RCR as well as other actions being taken to de-risk market and
counterparty exposures), which may not occur as anticipated, in a timely
manner, or at all.
The Basel Committee changes and other future changes to capital
adequacy and liquidity requirements in the European Union, the UK, the
US and in other jurisdictions in which the Group operates, including any
application of increasingly stringent stress case scenarios by the
regulators in the UK, the US and other jurisdictions in which the Group
undertakes regulated activities, may require the Group to raise additional
Tier 1 (including CET1) and Tier 2 capital by way of further issuances of
securities, and may result in existing Tier 1 and Tier 2 securities issued
by the Group ceasing to count towards the Group’s regulatory capital,
either at the same level as at present or at all.