RBS 2013 Annual Report Download - page 532
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Additional information
530
Risk factors continued
The market perception of bank credit risk has changed significantly as a
result of the financial crisis and banks that are deemed by the market to
be riskier have had to issue debt at a premium. Any uncertainty regarding
the perception of credit risk across financial institutions may lead to
reductions in levels of interbank lending and associated term maturities
and may restrict the Group’s access to traditional sources of funding or
increase the costs of accessing such funding. The ability of the Group’s
regulator to bail-in senior debt which may be exercised as soon as either
the provisions of the Banking Reform Act 2013 are implemented through
secondary legislation or the RRD comes into effect, may also increase
investors’ perception of risk and hence affect the availability and cost of
funding for the Group.
The Group’s liquidity and funding management focuses, among other
things, on maintaining a diverse and appropriate funding strategy for its
assets in line with the Group’s wider strategic plan. The Group has, at
times, been required to rely on shorter-term and overnight funding with a
consequent reduction in overall liquidity, and to increase its recourse to
liquidity schemes provided by central banks. Such schemes require the
pledging of assets as collateral and changes to asset valuations or
eligibility criteria can negatively impact the available assets and reduce
available liquidity access particularly during periods of stress when such
lines may be needed most. Although conditions have improved, there
have been recent periods where corporate and financial institution
counterparties have reduced their credit exposures to banks and other
financial institutions, limiting the availability of these sources of funding.
Under certain circumstances, the Group may need to seek funds from
alternative sources potentially at higher costs than has previously been
the case, and/or with higher collateral or may be required to consider
disposals of other assets not previously identified for disposal to reduce
its funding commitments.
The Group relies on customer deposits to meet a considerable portion of
its funding and it has targeted maintaining a loan to deposit ratio of
around 100%. The level of deposits may fluctuate due to certain factors
outside the Group’s control, such as a loss of confidence, increasing
competitive pressures for retail customer deposits or the encouraged or
mandated repatriation of deposits by foreign wholesale or central bank
depositors, which could result in a significant outflow of deposits within a
short period of time. An inability to grow, or any material decrease in, the
Group’s deposits could, particularly if accompanied by one of the other
factors described above, have a material adverse impact on the Group’s
ability to satisfy its liquidity needs.
The occurrence of any of the risks described above could have a material
adverse impact on the Group’s financial condition and results of
operations.
The regulatory capital treatment of certain deferred tax assets recognised
by the Group depends on there being no adverse changes to regulatory
requirements
While there was no restriction on the recognition of deferred tax assets at
31 December 2013, the Capital Requirements Regulation, which took
effect from 1 January 2014, requires the deduction in full from CET1
capital of deferred tax assets that rely on future profitability and do not
arise from temporary differences (for example, deferred tax assets
related to trading losses). Other deferred tax assets which rely on future
profitability and arise from temporary differences are subject to a
threshold test and only the amount in excess of the threshold is deducted
from CET1 capital. The PRA has not adopted the transitional provisions
in relation to the change in the treatment of deferred tax assets and
therefore the threshold deduction has the potential to impact CET1
capital from 1 January 2014.
Each of the Group’s businesses is subject to substantial regulation and
oversight. Significant regulatory developments and changes in the
approach of the Group’s key regulators has had and is likely to continue
to have a material adverse effect on how the Group conducts its business
and on its results of operations and financial condition
The Group is subject to extensive financial services laws, regulations,
corporate governance requirements, administrative actions and policies
in each jurisdiction in which it operates. Many of these have been
changing and are subject to further change, particularly in the current
regulatory and market environment, where there have been
unprecedented levels of government intervention (including
nationalisations and injections of government capital), changes to the
regulations governing financial institutions and reviews of the industry, in
the UK, in many other European countries, the US and at the EU level.
As a result of the environment in which the Group operates, increasing
regulatory focus in certain areas and ongoing and possible future
changes in the financial services regulatory landscape (including
requirements imposed by virtue of the Group’s participation in
government or regulator-led initiatives), the Group is facing greater
regulation and scrutiny in the UK, the US and other countries in which it
operates (including in relation to compliance with anti-bribery, anti-money
laundering, anti-terrorism and other similar sanctions regimes).
Although it is difficult to predict with certainty the effect that all of the
recent regulatory changes, developments and heightened levels of public
and regulatory scrutiny will have on the Group, the enactment of
legislation and regulations in the UK and the EU, the other parts of
Europe in which the Group operates and the US (such as the bank levy
and Banking Reform Act 2013 in the UK, the RRD and CRD IV or the
Dodd-Frank Wall Street Reform and Consumer Protection Act in the US)
has resulted in increased capital and liquidity requirements, changes in
other regulatory requirements and increased operating costs and has
impacted, and will continue to impact, products offerings and business
models. The Group may not be able to meet increased capital
requirements by reducing lending which could result in the Group being
obliged to continue to deploy capital in less profitable areas than it might
otherwise have chosen. Such changes may also result in an increased
number of regulatory investigations and proceedings. Any of these
developments could have an impact on how the Group conducts its
business, applicable authorisations and licences, the products and
services it offers, its reputation, the value of its assets, and a material
adverse effect on its funding costs and its results of operations and
financial condition.