RBS 2013 Annual Report Download - page 534
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Additional information
532
Risk factors continued
The impact of any final legislation on the Group is difficult to estimate with
any precision at this stage. The Statutory Instruments setting out the
scope of the ring-fence required by the Banking Reform Act 2013 are
currently under discussion and final versions are expected to be
published at some point in the summer of 2014. The PRA will have
responsibility for drawing up the ring-fencing rules which will impact on
the governance and operation of the ring-fenced bank. It is understood
that the first consultation on the PRA rules will commence around the
summer of 2014. It is also likely that ring-fencing certain of the Group’s
operations would require significant restructuring with the possible
transfer of large numbers of customers between legal entities. Ring-
fencing is also likely to entail changes to the structure of the Group’s
existing pension arrangements, so as to ensure that any ring-fenced and
non-ring-fenced banks that may eventually be established should not be
liable for each other’s pension liabilities. Any such changes could result in
additional costs and increased operational risks. It is possible that such
ring-fencing, by itself, or taken together with the impact of other proposals
contained in this legislation and other EU legislation that will apply to the
Group could have a material adverse effect on the Group’s structure and
on the viability of certain businesses, in addition to the Group’s results of
operations, financial conditions and prospects.
On 29 January 2014, the EC published proposals on structural measures
to improve the resilience of EU credit institutions which included potential
separation of certain trading activities from retail banking operations. The
proposal currently contemplates that member states having already
implemented ring-fencing legislation, such as the UK, may apply for a
derogation from the separation of trading activities provisions included in
the proposals if they can satisfy the EC that such local legislation meets
the objectives and requirements set out in the EU proposal. The timeline
envisaged under the proposals would be the effective separation of other
trading activities to apply as of 1 July 2018.
Under the US Federal Reserve’s new rules which change how it
regulates the US operations of large foreign banking groups ( the “FBO
Rules”), foreign banking organisations with total global consolidated
assets of $50 billion or more (“Large FBOs”) and Large FBOs with total
US assets of $50 billion or more (excluding assets of US branches and
agencies of a Large FBO’s foreign banks and certain other US
subsidiaries) will have to create a separately capitalised top-tier US
intermediate holding company (IHC) that would hold all US bank and
non-bank subsidiaries. The IHC would be subject to US capital, liquidity
and other enhanced prudential standards on a consolidated basis.
Among other things, an IHC will be subject to the same US risk based
and leverage capital standards that apply to a US bank holding company.
The imposition of US capital, liquidity and other enhanced prudential
standards, including capital planning and stress testing requirements, on
an IHC of a Large FBO such as the Group that is subject to home country
capital standards on a group-wide consolidated basis would likely give
rise to challenging organisational and compliance issues and could make
it more difficult to manage capital and liquidity efficiently on a global,
consolidated basis. The foregoing is only one example of issues that the
Group may confront as a result of the application of the FBO Rules to its
US operations.
As a result of the adoption of the ring-fence proposals in the UK and the
potential adoption of the other proposals described above, major changes
to the Group’s corporate structure, its business activities conducted in the
UK and the US and potentially other jurisdictions where the Group
operates, as well as changes to the Group’s business model, are likely to
be required. The changes include ring-fencing certain core banking
activities in the UK from other activities of the Group as well as
restructuring other operations within the Group in order to comply with
these proposed new rules and regulations. The proposals, when adopted,
are expected to take an extended period of time to put into place, to be
costly to implement and may lack harmonisation, all of which could have
a material adverse effect on the Group’s structure, reputation, results of
operations, financial condition and prospects.
The Group is subject to resolution procedures under current and
proposed resolution and recovery schemes which may result in various
actions being taken in relation to any securities of the Group, including
the write off, write-down or conversion of the Group’s securities
As a result of its status as a GSIFI and in accordance with current and
proposed resolution and recovery schemes and the Prudential Standards
issued by the PRA on 19 December 2013 on recovery and resolution
planning, the Group was required to meet certain resolution planning
requirements contemplating its possible failure by the end of 2012 and
2013 and will be required to meet others in 2014. The Group made the
required submissions in 2012 to the Financial Services Authority (FSA)
(now the PRA) and its US business made their required submissions to
the Federal Reserve and the FDIC in H1 2013 and further submissions
will be required to be made in 2014. Similar to other major financial
institutions, both the Group and its key subsidiaries remain engaged in a
constructive dialogue on resolution and recovery planning with key
national regulators and other authorities. The Prudential Standards
issued by the PRA may evolve over time to ensure continued consistency
with the Financial Stability Board’s (FSB) recommendations and the
technical standards and guidelines produced by the European Banking
Authority to implement the RRD.
In addition to the powers provided by the Banking Act 2009, as amended
by the Banking Reform Act 2013, that include a bail-in power which could
be implemented prior to January 2015, resolution powers will also be
included in the RRD. The EU Member States, the European Parliament
and the EC reached a political agreement as announced on 12
December 2013 on the RRD (which remains subject to technical
finalisation and formal approval by the co-legislators) and current
expectations are that the RRD will be finalised during the second quarter
of 2014. The draft RRD includes a “bail-in” tool, which would give the
relevant supervisory authorities the power to write down or write off
claims (including debt securities issued by the Group and its subsidiaries)
of certain unsecured creditors of a failing institution and/or to convert
certain debt claims to equity. Except for the general bail-in tool, which is
now expected to be implemented by 1 January 2016, it is currently
contemplated that the measures set out in the draft RRD (including the
power of authorities to write off or convert Additional Tier 1 and Tier 2
instruments) will be implemented with effect from 1 January 2015.