• Maintain stakeholder confidence. To ensure that stakeholders have confidence in RBS’s ability to attain its strategic objectives and establish and maintain an appropriate business culture and operational controls.
Risk appetite starts with the strategic goals and risk philosophy set by the
The risk appetite framework is based on four main pillars: • Business and financial targets - RBS has set long-term targets for capital ratio, leverage ratio, loan:deposit ratio, the return on tangible equity and cost:income ratio. These are the broad boundaries within which it operates.
• Quantitative risk appetite targets - Risk appetite is also aligned with potential risk exposures and vulnerabilities under severe but plausible stress conditions. Quantitative targets, to be met under stress conditions, are set around the strategic risk objectives for maintaining capital adequacy, delivering stable earnings growth and ensuring stable and efficient access to funding and liquidity.
These limits support and are required to be consistent with the highlevel risk appetite targets.
Effective processes for reporting the results have also been developed, presenting the Board and senior management with a more holistic and dynamic view of key risk exposures.
• Enables each business to understand its acceptable levels of risk.
Risk control frameworks and their associated limits are an integral part of the risk appetite framework and a key part of embedding risk appetite targets in day-to-day risk management decisions. The risk control frameworks manage risk by expressing a clear tolerance for material risk types that is aligned to business activities.
RBS’s ambition to build “a truly customer-centric bank”. A strong risk culture is a key part of ensuring risk appetite is effectively embedded across RBS. The link between risk appetite and strategic objectives encourages people at all levels of the business to think about risk, how they identify it and how they manage it. It incorporates the quantitative and qualitative aspects of risk and uses both absolute and relative risk measures.
The embedding of RBS’s values into a strong risk culture is supported by a revised and more focused Code of Conduct. The Code provides guidance on expected behaviour and sets out the standards of conduct that support the values. It explains the effect of decisions that are taken and describes the principles that must be followed.
These business principles cover conduct-related issues as well as wider business activities. They focus on desired outcomes, with practical guidelines to align the values with commercial strategy and actions. The embedding of business principles facilitates sound decision making and a clear focus on good customer outcomes in ‘the moments that matter’. It is aligned with the people management and remuneration processes to support a positive and strong risk culture through appropriate incentive structures.
A simple decision-making guide (called the “YES check”) has been included in the Code of Conduct. It is a simple, intuitive set of five questions, designed to ensure the values guide day-to-day decisions: • Does what I am doing keep our customers and RBS safe and secure?
• Am I happy with how this would be perceived on the outside?
Each question is a prompt to think about the situation and how it fits with
Across the risk management function, a series of events and activities have been undertaken to bring alive the bank’s values and culture for employees. This is supported by performance management processes that hold individuals to account for poor behaviour and reward the behaviour that supports the bank’s purpose, vision and values.
Conduct risk 185 Sources of risk 185 Key developments in 2014 186 Controls and assurance 186 Risk appetite 186 Risk monitoring and measurement
RBS continued to remediate historical conduct issues, while also restructuring its customer-facing businesses and support functions around the needs of its customers. Specific actions taken by RBS to address underlying control deficiencies included: • Strengthening significantly the systems and controls governing
RBS’s LIBOR submissions. An independent and ring-fenced rate setting team was created, and new preventative and detective controls were also put in place, including independent monitoring and statistical checking of submissions. A new rate-setting board was also created to oversee the submission process.
operating model and governance structure, by integrating former divisional and functional resources to drive consistent bank-wide standards for managing conduct risks more efficiently; *unaudited
C&RA, and the establishment of a specialist remediation centre to deliver fair, consistent and timely customer outcomes; • Developing product risk management tools to improve the customer outcomes of new products; • Ensuring the focus of RBS’s culture is always about delivering good customer outcomes. Although a long-term project, RBS is confident that it has already resulted in material changes to the way business is conducted; and
C&RA is responsible for defining appropriate standards of conduct, and for designing the framework for managing conduct risk, driving adherence, and overseeing remediation activity. It also provides appropriate controls, challenge and oversight to ensure good customer outcomes. In so doing, C&RA acts as a second line of defence control function.
(accountable to the Executive Risk Forum) ensures that the customer businesses and the Services function fulfil strategic objectives by identifying and managing their financial crime risks effectively.
During 2014, in addition to the provision of risk-based assurance over key conduct, financial crime, systems and infrastructure topics, the C&RA
Conduct Authority (FCA) attestations, principally those relating to complaints and anti-money laundering (AML). Assurance activities are pre-emptive in highlighting conduct issues and influencing the business to re-consider the impact of their approach; and are flexible so as to achieve the right customer outcomes.
Risk assessments are used to identify material conduct risks and key controls across all business areas. The risk assessment process is designed to confirm that risks are effectively managed and prioritised and controls are tested to verify that they operate effectively.
Scenario analysis is used to assess the impacts of extreme but plausible conduct risks including financial crime. The scenarios assess the exposures that could significantly affect RBS’s financial performance or reputation and are an important component in the operational risk framework and capital model.
RBS has articulated a customer-focused vision to be the leading UK bank for trust, customer service and advocacy by 2020. In line with this, C&RA
has evolved from focusing on policy compliance towards considering the wider business implications of placing customers at the heart of the business.
RBS’s risk profile is based on its strategic risk objectives, with quantitative targets supplemented by qualitative criteria focused on attaining good customer outcomes, upholding market integrity, meeting stakeholder expectations and promoting a strong risk culture. Work to refine and embed the risk appetite framework and associated control processes continues in 2015.
The reporting has been enhanced to be more focused, forward-looking and action-oriented.
C&RA is working with the business franchises to define the data required to ensure appropriate customer outcomes are delivered and are compliant with the Basel Committee on Banking Supervision principles for effective risk data aggregation and risk reporting. RBS’s ability to aggregate, analyse and report conduct risk internally is being enhanced so it can assess the effectiveness of mitigating actions.
Operational risk 188 Sources of risk 188 Key developments in 2014 188 Risk governance 189 Controls and assurance 189 Risk appetite 189 Risk identification and assessment 189 Risk mitigation 189 Risk monitoring 189 Risk measurement
Operational risks may have a direct customer or reputational impact (for example, a major IT systems failure or fraudulent activity) or both.
The transformation programme affects many of its people and their tasks.
RBS is monitoring the resourcing impacts arising from this, as it recognises that employee capacity and engagement are essential to delivering change and completing day-to-day activities.
The threat to the security of RBS’s information from cyber attacks is a key focus for operational risk. During 2014 specific enhancements were made to cyber security programmes, mitigating a number of identified vulnerabilities. RBS continues to monitor this threat closely as it continues to develop rapidly.
Control Environment Certification (CEC) is used to review and assess the internal control framework. Members of the senior management team are required to provide a bi-annual assessment of the robustness of the internal control environment including: • Compliance with the requirements of the UK Corporate Governance
Code; • Appropriateness of the risk frameworks and governance structures of each customer-facing business and support function to help ensure RBS operates within risk appetite; • Adequacy of reporting on the material risks for the business against appetite; and
Risk assessments are used to identify and assess material operational risks and key controls across all business areas. To provide a consistent categorisation of risks and controls across RBS and to support identification of risk concentrations, all risks and controls are mapped to the risk taxonomy and the control catalogue. Risk assessments are refreshed at least annually to ensure they remain relevant and capture any emerging risks.
Risks are mitigated by a suite of regularly assessed controls but, where the residual exposure is outside of risk appetite, the relevant customer business must decide how to reduce it. This is carried out in accordance with the operational risk management process, the objective of which is the adoption of a consistent approach to the management of issues and actions to mitigate risks outside appetite. The process continues to be enhanced, with analysis of common issues on an aggregated basis across the bank, to identify emerging trends and to make improvements to the quality of data.
Scenarios are run in their own dedicated workshops, bringing business and risk and control experts together, thereby providing management with a deeper understanding of risk exposures.
RBS further refined its approach to assessing the impact of the economic cycle on its operational risk losses by assessing the impact of the Prudential Regulation Authority’s published Anchor 6 scenario. This describes the impact of a series of country-specific shocks on levels of operational risk losses, and also capital adequacy requirements for operational risk.
Operational risk is measured utilising an economic Capital model. This model is also included within the ICAAP assessment to ensure that capital requirements are appropriately calculated using internal loss, external loss and scenario data.
The event and loss data management process aims to ensure compliance with standard requirements for the management of operational risk events and the capture of loss data. It also entails reporting operational risk events that meet defined threshold criteria to
All losses and recoveries associated with an operational risk event are reported against their financial accounting date. A single event can result in multiple losses (or recoveries) that may take time to crystallise. Losses and recoveries with a financial accounting date in 2014 may relate to events that occurred, or were identified in, prior years.
At 31 December 2014, events aligned with clients, products and business practices accounted for 95% of the losses (compared to 98% in 2013).
Regulatory risk 192 Sources of risk 192 Key developments in 2014 192 Risk appetite 192 Risk monitoring and measurement 192 Risk mitigation
C&RA maintains well-established policies and supporting processes to ensure timely identification of, and effective responses to, changes in official requirements affecting the bank. C&RA also maintains a structured and open engagement with regulators. That engagement underpins a range of other policies and processes that address on-going compliance with regulatory obligations (refer to the section on Conduct risk on page 184 for further information).
(MCAC), chaired by C&RA, was established. The MCAC reports to the
‘reception committee’ for reviewing externally mandated changes that may affect RBS and recommending appropriate responses, including the timely mobilisation of change implementation activities. In doing so, it agrees business or function owners of individual risks; and commissions and reviews impact assessments from customer businesses and functions.
Board and Executive Committee oversight of changes to regulatory requirements is supported by the MCAC.
Political, Legislative and Regulatory Environment Policy and supporting documents, together with associated processes, tools and governance. It also oversees the regulatory developments operating framework, to ensure it meets the needs of all businesses and functions, and maintains the Relationships with Regulators Policy.
RBS believes that maintaining a strong regulatory risk framework is fundamental to ensuring sustainable growth, rebuilding its reputation and maintaining stakeholder confidence. Accordingly, its stated regulatory risk and compliance risk appetite is for no material or widespread breaches of rules, expectations, regulations or laws, individually or in aggregate.
However, it also recognises that genuine errors occur, and so it accepts limited, non-material regulatory risk and subsequent loss.
C&RA ensures appropriate reporting of all material regulatory reviews and other regulatory developments worldwide to the appropriate bankwide committees, including the Board, the Group Audit Committee, and the Board Risk Committee. Half-yearly reporting to the Group Audit
The level of regulatory risk remained high during 2014, as policymakers and regulators continued to strengthen regulation and supervision in response to the events of 2007 and 2008. This resulted in high levels of interaction between RBS and supervisory authorities through meetings, requests for information, visits and investigations, as well as in policy developments and proposals for new rules.
Reputational risk is the risk to RBS’s public image owing to a failure to meet stakeholders’ expectations in relation to performance, conduct and business profile. Stakeholders include customers, investors, employees, suppliers, government, regulators, special interest and consumer groups, media and the general public.
Reputational risk can arise from the conduct of either RBS as a whole or that of the individuals it employs; from the activities of customers and the countries in which they operate; from the products RBS offers and the transactions it supports; and from its operations and infrastructure.
The importance of reputational risk was reinforced with the appointment of a Head of Reputational Risk, together with improvements to governance frameworks to manage this risk in business franchises. A
senior RBS-wide Reputational Risk Forum (RRF) and fora in all business franchises were established. These bodies consider customers, transactions, products or issues that present material reputational risks to the organisation, and have the power to decline business or to set conditions.
The most material threats to RBS’s reputation continued to originate from historical and more recent conduct deficiencies. As a result, RBS has been the subject of investigations and reviews by a number of its regulators, some of which have resulted in fines and public censure.
Refer to the Litigation, investigations and reviews section on page 430.
Managing reputational risk is taken very seriously, with Board-level oversight reinforced by a Reputational Risk Policy, and by governance frameworks across business franchises.
The Sustainable Banking Committee is responsible for overseeing and challenging how management is addressing sustainable banking and reputation issues including risk appetite for environmental, social and ethical (ESE) issues.
The Board’s oversight of reputational issues is supported by the senior
RBS-wide RRF which opines on cases that represent a material reputational risk to the whole organisation. The RRF, which has delegated authority from the Executive Risk Forum, also acts as a central forum to review thematic issues and risk appetite positions. Business franchises also have in place reputational risk approval fora to deliberate on customers, transactions, products or issues that may present a reputational risk for their businesses. An example is the Global
The Reputational and ESE Risk management team assists business franchises, as well as other control functions, to articulate risk appetite to manage reputational risk. Risk appetite positions for certain issues or markets, for example tax or money remitters, are developed through conducting research on legislation, regulation and potential reputational risk factors, undertaking peer analysis and engaging with internal and external stakeholders to discuss the issues. The risk appetite positions classify risks associated with a particular area into Normal, Sensitive and
Emerging reputational issues are identified by the business and relevant teams, including RBS Sustainability and Enterprise Wide Risk, which assess new and emerging business, sector and country risks. The Risk
ESE ratings of customers and transactions are captured and analysed centrally by the Reputational and ESE Risk Team.
Also important is the setting of clear reputational risk appetite criteria, ensuring higher risk cases are escalated for senior level approval.
Effective communication channels and incident response planning also ensure that cases that result in reputational impact are appropriately managed, for example by declining or exiting business or by ensuring incident management plans are implemented to manage the impact of negative media coverage.
RBS aims to maintain an appropriate level of capital to meet its business needs and regulatory requirements, and operates within an agreed risk appetite. The appropriate level of capital is determined based on the dual aims of: (i) meeting minimum regulatory capital requirements; and (ii)
ensuring RBS maintains sufficient capital to uphold customer, investor and rating agency confidence in the organisation, thereby supporting its business franchises and funding capacity.
• The leverage ratio under 2014 Basel III framework improved from
• Going forward, RBS is focused on delivering a capital plan in-line with its strategic objectives which includes the divestment of CFG by the end of 2016 and further run down of RCR and CIB assets.
• From 2015 RBS will target a c.13% CET1 ratio during the period of
• RBS plans to issue around £2 billion of CRR-compliant Additional
RBS’s current Pillar 2A requirement is 3.5% of RWAs at 31 December 2014. From 1 January 2015, 56% of the total Pillar 2A or 2.0% of RWAs is required to be met from CET1 capital. Pillar 2A is a point in time assessment of the amount of capital that is required to be held to meet the overall financial adequacy rules. The Prudential Regulation Authority
(PRA) assessment may change over time, including as a result of at least an annual assessment and supervisory review of RBS’s internal capital adequacy assessment process.
Based on the assumptions above, assuming a 13% steady state CET1 capital ratio is achieved, RBS currently estimates that it would have headroom of 2.5% to fully phased MDA trigger in 2019. This headroom will be subject to ongoing review to accommodate regulatory and other changes.
The European Union has implemented the Basel III proposals through the Capital Requirement Regulation (CRR) and the Capital Requirements
Directive (CRD), collectively known as CRD IV. CRD IV was implemented on 1 January 2014. The European Banking Authority’s technical standards which will provide clarification of the CRD IV, are either in progress to be finalised through adoption by the European Commission and implemented within the UK, or delegated regulation now adopted.
In December 2013 the PRA issued its policy statement (PS7/13) outlining changes to its Rulebook as a result of CRD IV, and finalising requirements for the minimum level of CET1 capital as follows: • Firms must meet a 4% Pillar 1 CET1 requirement in 2014, rising to 4.5% from 1 January 2015. Similarly, the Tier 1 capital ratio will be 5.5%, rising to 6% from 1 January 2015 onwards. Total capital remains at 8%.
The Executive Committee is responsible for managing strategic, financial, capital, risk and operational issues affecting RBS. It reviews and debates relevant items before they are submitted to the Board and relevant board committees. It also considers recommendations from the Executive Risk
RBS Asset and Liability Committee (ALCo) is a sub-committee of ERF.
RBS ALCo is responsible for identifying, managing and controlling balance sheet risks in executing its business strategy. RBS Treasury is responsible for managing the RBS balance sheet in accordance with
RBS ALCo policy and direction. RBS ALCo is the body with responsibility in determining that financial balance sheet risk limits and for ensuring the asset and liability management functions manage their balance sheets within the limits set by RBS ALCo.
It is RBS’s policy to build and sustain a strong capital base and to use it efficiently throughout its activities to support strategic objectives and ultimately optimise shareholder returns while maintaining a prudent relationship between its capital base and the underlying risks of the business. In carrying out this policy, RBS follows the regulatory requirements of the “twin peaks” regulatory structure in the UK under the supervision of the FCA and the PRA, also having regard to other regulators, rating agencies, its peer group and market expectations.
Each business in RBS is subject to performance metrics respecting regulatory capital requirements to ensure that relevant Individual Capital
RBS continually reviews the potential impact on capital adequacy of emerging regulatory developments and actively assesses headroom against a range of stress scenarios. Recovery plans are dynamically maintained and contingency or remediation options are calibrated to determine scope to address potential capital shortfalls. All authorised institutions in RBS are required to ensure adequate capital is maintained at all times; they must also monitor and report regulatory capital and
RWAs on a regular basis. The level and appropriateness of internal capital buffers at CET1, Tier 1, Tier 2 and total capital levels, is reviewed by RBS ALCo and reset as considered appropriate, at least annually.
Capital resources are allocated to businesses based on key performance parameters agreed by the Board in the annual strategic planning process.
RBS aims to deliver sustainable returns across the portfolio of businesses with projected business returns stressed to test key vulnerabilities.
• MIRAs consider whether capital should be set aside against each risk type and, if so, under which pillar, how much and of what type. If capital is not appropriate, MIRAs outline how risk types are otherwise managed. In so doing, MIRAs form a key input to the
• To focus risk management on areas of greatest benefit, MIRAs consider in depth risks whose potential impact is ‘material’, that is exceeding appropriately chosen financial or non-financial thresholds.
(owners, governing committees, limit or tolerance frameworks including risk appetites, control policies and key reports) are specified clearly and assessed for appropriateness and effectiveness.
• Stress test execution and governance: ° Impacts of stress scenario is translated via relevant risk drivers such as RWAs, impairments; ° Profit and loss impacts of stress scenario are also assessed; and
° Review of stress output by the business as well as risk treasury and finance teams.
• Management actions and governance: ° Internal subject matter experts determine a ‘menu’ of possible management actions under stress conditions such as capital raising, de-risking and sale of assets, cost reduction; ° Review by senior risk management and executives; and
The EBA adverse scenario assumed an increase in global investor risk aversion that triggers financial market turmoil and has subsequent adverse impacts on economic activity worldwide. The scenario envisaged sharply rising long-term interest rates and yields in developed economies alongside a souring of market sentiment globally, resulting in financial markets distress and recessions in a range of countries, including the UK.
From an 8.6% CET1 capital under full CRR rules as at 31 December 2013, RBS achieved a CET1 ratio of 5.7% after the adverse scenario, marginally above the minimum 5.5% required, an indication of the level of stressed risk in RBS’s exposures at the time. RBS strengthened its capital throughout 2014 and had a CET1 ratio of 10.8% at 30 September 2014, prior to disclosure of the EBA stress test results in October 2014.
variant scenario examined the resilience of UK banks to a housing market shock and a snap-back in interest rates, triggered by sharp sterling depreciation and inflationary pressures. Under the scenario, the
RBS achieved a CET1 ratio of 5.2% after the impact of regulatory agreed management actions, just above the minimum 4.5% required. RBS
strengthened its capital throughout 2014 and had a CET1 ratio of 10.8%
As the RBS risk profile improves as a result of deleveraging and rundown of higher risk and capital intensive assets, RBS is well placed to withstand extreme stress scenarios.
In March 2014, the Federal Reserve Board (FRB) completed its review of
Frank Act Stress Test results. In that test, across every category, CFG’s projected capital ratios ranked in the top quartile of the 30 largest bank holding companies under the hypothetical supervisory severely adverse stress scenario. However the FRB objected on qualitative grounds to the capital plan submitted as part of the CCAR capital plan. FRB cited significant deficiencies in capital planning processes, including inadequate governance, weak internal controls and deficiencies in practices for estimating revenues and losses under a stress scenario and for ensuring the appropriateness of loss estimates across business lines in a specific stress scenario. Although the FRB acknowledged that bank holding companies such as CFG that are new to the CCAR process are subject to different expectations, CFG’s weaknesses were considered serious enough to warrant FRB’s objection. As a result, CFG are not permitted to increase its capital distributions above 2013 levels until a new capital plan is approved by the Federal Reserve Board.
The outcome of the AQR did not require an adjustment to the balance sheets of either UBIL or RBS N.V. In the stress test, both UBIL and RBS
N.V. maintained capital ratios above the minimum 5.5% under the adverse scenario.
In addition to informing the ICAAP, stress testing within RBS has matured into business as usual process embedded across our risk management framework. It has become a key risk management tool and is used to support strategic financial planning, risk appetite, risk identification and risk mitigation as illustrated below.
The ICAAP consists of two types of internal capital assessment: • Point-in-time capital assessment as at the financial year end: - Pillar 1 - CET1 4.5% of credit, market and operational RWAs at the financial year end.
• Forward-looking stress capital assessment: - Pillar 2B - Capital planning buffer is set to ensure RBS maintains adequate capital resources in stress to allow it to continue to meet the minimum capital requirements. Current capital planning buffer will be replaced by the PRA buffer from 1 January 2016.
Component parts of the ICAAP are set out in the diagram below.
N.V. and CFG also go through a similar planning process to ensure that they are compliant with local regulatory rules. These plans are reviewed and challenged to ensure that they are consistent with RBS risk appetite, policies and strategic targets.
is intended to ensure that a bank group maintains sufficient consolidated resources not only to reduce the likelihood of insolvency but also to allow for orderly resolution and recapitalisation of insolvent operating subsidiaries in the event of a banking group’s insolvency.
• Inclusion of PRA (and/or firm) stress buffers making stress a key driver of bank target CET1 ratios.
In line with regulatory requirements, RBS prepares regular recovery plans, which include a framework of indicators identifying the points at which appropriate actions may be taken in the event of unexpected weaknesses in its capital or liquidity resulting from either idiosyncratic or systemic stress, as well as a menu of options for addressing such weaknesses.
RBS’s 2014 Recovery Plan was prepared in line with PRA policy
Plans were submitted to the Financial Services Authority (the PRA’s predecessor body) in December 2011 and June 2012, and to the PRA in
Economic capital is an internal measure of the risks to which RBS is exposed and is used as a supplement to other risk and capital management tools, such as stress testing and regulatory capital. The measure includes risk exposures for credit, market, business, operational, pension, fixed asset and interest rate risk in the banking book. These models capture risks not fully addressed within the Pillar 1 regulatory framework e.g. concentration, pension, interest rate, business and diversification.
The characteristics of the models are consistent across risks, business lines and throughout the economic cycle, but are also flexible to allow outcomes to be employed for a number of purposes e.g. severity level/confidence interval, time horizon and correlations. Models have been developed internally but are subject to rigorous governance including external benchmarking, independent validation and extensive internal review and challenge. Models are regularly reviewed and continue to be updated for new data sources and improvements in risk modelling methodology.
In addition to the capital requirements under CRD IV, the resolution and recovery directive (RRD) introduces requirements for banks to maintain at all times a sufficient aggregate amount of own funds and eligible liabilities (that is, liabilities that may be bailed in using the bail-in tool), known as the minimum requirements for eligible liabilities (MREL). The aim is that the minimum amount should be proportionate and adapted for each category of bank on the basis of their risk or the composition of their sources of funding.
SIBs, but there remains a degree of uncertainty as to the extent to which
UK and overall capital requirements will be subject to the exercise of certain discretion by the PRA, RBS is currently unable to predict the impact such rules will have on the overall capital requirements or how they will affect compliance with applicable capital and loss absorbency requirements.
(P2A) capital and to provide greater transparency of the PRA capital setting process by allowing firms to manage present and future regulatory capital demands. Proposed changes are as follows: • The variable element of P2A to be expressed as a percentage of
is a formula comprising both a variable and a fixed element; • The PRA buffer will replace the current Capital Planning Buffer
CET1 in full immediately; • Firms considered to have weak risk management and governance will be required to hold additional PRA buffer applied on a scalar ranging from 10-40% of a firms CET1 Pillar 1 plus P2A capital requirements; and
• Firms will have the discretion to publicly disclose their aggregate
P2A requirements by 0.23% of RWAs. Implementation will be from 1
January 2016 in line with the CRD IV capital conservation and systemic buffers and the EBA’s Supervisory Review and Evaluation Process guidelines.
The new proposal is intended to replace the gone-concern loss absorbing capital concept previously expected to be the template within the G-SIB’s resolution strategies.
The proposed minimum TLAC requirements are as follows: • Between 16% and 20% of RWAs and at least double the Basel III
Tier 1 leverage ratio requirements - 16% represents roughly twice the minimum capital requirement (8%) under Basel III; • A certain minimum (currently undefined) amount of the TLAC
requirement will need to be met with non-equity instruments - AT1,
Tier 2 or even Tier 3 or bail-in able debt; • Minimum TLAC requirements will sit below the combined buffer requirements which may lead to consequences on MDA restrictions; • The loss absorption should be legally enforceable and should not give rise to systemic risk or disruption to the provision of critical functions. Therefore, to prevent a G-SIB resolution to spread contagion into the banking system, internationally active banks will be prevented from holding TLAC issued by other G-SIBs; *unaudited
• TLAC will be distributed by resolution entities to material subsidiaries which are themselves not resolution entities. Sufficient internal TLAC will be prepositioned on the balance sheet of material subsidiaries; and
• Under the policy proposal TLAC is now defined as an additional rather than a parallel capital requirement to the Basel III framework and a breach of the minimum TLAC could trigger the same restrictions set out in the Basel III framework for MDA. However, this would technically be the consequence of a direct breach of the CRD
The FSB is currently working on draft principles with the rule expected to be in force by 1 January 2019.
The following developments will also impact RBS’s capital: • The Basel Committee on Banking Supervision: ° Has proposed a recalibration of the credit risk standardised approach with implementation in 2017 with initial view of the new rules due in 2015.
° Has instigated a fundamental review of the trading book which will impact how the risk of trading book activity is measured.
• The PRA and FPC are looking at placing a floor on the risk-weight applied to mortgages in calculating the risk-weight. The level of the floor is currently being debated and current expectations are application in 2015.
• The Financial Services (Banking Reform) Act passed into UK law in
• The US Federal Reserve Board’s final rule issued in February 2014, establishing enhanced prudential standards for foreign banking organisations.
Capital and leverage ratios Capital, RWAs and risk asset ratios, on the basis of transitional rules and end-point CRR, calculated in accordance with PRA definitions, are set out below.
CRR basis (1) basis CRR basis (1) basis (2) 2.5 basis 2.5 basis
Measures in relation to end-point CRR basis, including RWAs, are based on the current interpretation, expectations, and understanding, of the CRR requirements, as well as further regulatory clarity and implementation guidance from the UK and EU authorities (end-point CRR basis). The actual end-point CRR impact may differ when the final technical standards are interpreted and adopted.
Qualifying instruments and related share premium subject to phase out — 5,820 — 5,831 — —
CRR basis basis CRR basis basis basis basis £m £m £m £m £m £m
Dated subordinated debt - net of amortisation — — — — 12,436 13,420
Tier 2 deductions 50% of securitisation positions — — — — (748) (1,107)
Share capital and reserve movements in respect of employee share schemes 205 — 205
• Tier 2 issuances of £2.2 billion comprised €1 billion 3.625%
The leverage exposure is based on the revised 2014 Basel III leverage ratio framework. The leverage ratio as originally included in the CRR is aligned with the internationally agreed ratio from January 2015. End-point CRR basis (2)
Additional analysis of derivative notionals and undrawn commitments, two of the major components included in the balance sheet contributing to the leverage exposure, is set out below.
The table below analyses the derivative notionals by maturity for contracts other than credit derivatives and credit derivatives by qualifying and not. Derivative other than credit derivative Credit derivative
Capital management* continued Weighted undrawn commitments UK Personal & Corporate & Citizens
Banking Bank Banking Banking Banking Central items Group Total 2014 £bn £bn £bn £bn £bn £bn £bn £bn £bn 2013 Non-Core 9.4 1.5 15.9 3.1 56.1 2.7 10.6 0.9 100.2 Note: (1) Based on a 10% credit conversion factor.
The table below analyses the movement in credit risk RWAs by key drivers during the year.
The table below analyses movements in market and operational risk RWAs during the year.
CIB Other Total Operational risk Total £bn £bn £bn £bn £bn
Note: (1) Modelled refers to advanced internal ratings basis for non-counterparty credit risk, internal model method for counterparty credit risk, and value-at-risk and related models for market risk. These principally relate to CIB (£83 billion) and Commercial Banking (£48 billion).
The table below analyses RWA movements by segment during the year.
Banking Bank Banking Banking Banking items Group RCR Non-Core Total £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn
Notes: (1) Risk parameter changes relate to changes in credit quality metrics of customers and counterparties such as probability of default (PD) and loss given default (LGD). They comprise: - UK PBB and Ulster Bank: primarily reflects recalibration of PD and LGD models reflecting improvements to the UK economy. - RCR: decrease in defaulted assets (£1.0 billion) and internal rating upgrades for certain counterparties (£0.8 billion).
• RBS RWAs increased from £385 billion on a Basel 2.5 basis to £429 billion on a CRR basis principally reflecting: ° 1,250% risk weighting of securitisation positions; previously capital deductions; ° Impact of credit valuation adjustment and asset valuation correlation relating to banks and central counterparty; ° Implementation of CRR model suite; and
° Reduction in risk weighting for small and medium sized enterprises (SME).
• UK PBB RWAs reduced due to improvements in credit quality, recovery in the UK economy and lower balances.
• In Commercial Banking, credit risk RWAs increased by £5 billion due to growth in loans (£2 billion) and methodology changes (£2 billion) and model changes (£1 billion), offset by a £2 billion decrease in operational risk RWAs.
In relation to RWA density: • The increase in RWA density of exposures reflected the impact of credit valuation adjustments and asset valuation correlation and those on structured entities related to revised RWA treatments, both relating to the implementations of CRD IV.
• Oil and gas RWAs were £8.5 billion at a density of 49%. Mining and metals RWAs were £3.3 billion with a density of 74%.
The tables below analyse exposure at default (EAD) after credit risk mitigation (CRM), RWAs and related RWA density (RWAs as a percentage of EAD)
by sector cluster. RWAs at 31 December 2014 are under current rules and 31 December 2013 are on a Basel 2.5 basis. Refer to page 215 for a bridge between balance sheet and EAD. EAD post CRM (1) RWAs RWA density
The table below provides a reconciliation between accounting and regulatory consolidation.
Cash and balances at central banks 74,872 (13) 650 75,509 82,659 — 430 83,089
Deposits by banks and customer accounts 452,304 893 5,452 458,649 534,859 (5) 4,150 539,004
Balance Consolidation Regulatory scope of Credit Netting and Capital Disposal differences and drawn off-balance Total sheet differences (1) consolidation market risk (2) provisions (3) collateral (4) deduction (5) groups (6) reclassifications (7) EAD sheet EAD EAD
2014 £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn
Assets of disposal groups 82.0 — 82.0 — — — — (82.0) — — — —
Notes: (1) Represents proportional consolidation of associates and deconsolidation of certain subsidiaries, as required by regulatory rules. Refer to previous page for additional details. (2) The exposures in regulatory trading book businesses are subject to market risk and are therefore excluded from EAD. Refer to the Market risk section on page 298. (3) Impairment loss provisions on loans and advances and securities, and credit valuation adjustment on derivatives. (4) Includes: - Reverse repos: reflects regulatory approach for securities financing transactions including netting of collateral and cash legs. - Loans and advances: cash collateral pledged with counterparties in relation to net derivative liability positions. - Derivatives: impact of master netting arrangements.
Liquidity and funding risk 217 Overview and key developments 217 Liquidity risk 217 - Policy, framework and governance 217 - Regulatory oversight and liquidity framework 218 - Measurement, monitoring and contingency planning 221 - Net stable funding ratio (NSFR)
222 Funding risk 222 - Sources and uses of funding 222 - Key funding metrics 224 - Loan:deposit ratios and funding surplus/(gap)
The risk arises through the maturity transformation role that banks perform. It is dependent on RBS specific factors such as maturity profile, composition of sources and uses of funding, the quality and size of the liquidity portfolio as well as broader market factors, such as wholesale market conditions alongside depositor and investor behaviour.
• The liquidity position strengthened with the liquidity portfolio of £150.7 billion at 31 December 2014 covering short-term wholesale funding (STWF) more than five times. STWF decreased by £4.6 billion to £27.8 billion mainly due to the buy-back and maturity of medium-term notes in CIB.
October 2015, LCR will replace the PRA’s current regime, with an initial minimum requirement of 80% rising to 100% by 2018.
• The net stable funding ratio (NSFR) based on RBS’s interpretation of the Basel framework was stable at 121% at 31 December 2014.
• Liquidity risk appetite is measured by reference to the liquidity portfolio as a proportion of net stressed outflows and ratio was 186%
• During 2014 RBS successfully issued £2.2 billion of Tier 2 subordinated debt, compared with £1.8 billion in 2013. RBSG plc had senior unsecured debt outstanding of £6.9 billion, excluding commercial paper and certificates of deposit, at 31 December 2014.
Based on its assessment of the Financial Stability Board’s proposals, RBS may issue between £3 - 5 billion per annum during 2015 - 2019 to meet total loss absorbing capital requirements.
compared with 94% at the end of 2013 with an increase in the funding surplus in PBB of £4.4 billion (UK PPB - £1.4 billion; Ulster
Adequacy Assessment (ILAA) stressed outflows, and is managed on a daily basis by legal entity, country, region and business. In setting risk limits the Board takes into account the nature of RBS various activities, the overall risk appetite, market best practice and regulatory compliance.
These actions include when and how to use the liquid asset portfolio, and what other adjustments to the balance sheet should be undertaken to manage these risks within the bank’s risk appetite.
RBS maintains an adequate liquid asset portfolio appropriate to the business activities of RBS and its risk profile.
• Incorporates liquidity costs, benefits and risks in product pricing and performance management: RBS uses internal funds transfer pricing to ensure that these costs are reflected in the measurement of business performance, and to correctly incentivise businesses to source the most appropriate mix of funding.
The principal regulator, the Prudential Regulation Authority (PRA), has a comprehensive set of liquidity regulations, the cornerstone of which is
Firms (BIPRU) 12 (until 30 September 2015). To comply with the PRA
• An annual Focused Liquidity Review (FLR) process with the PRA - a comprehensive review of the RBS ILAA, liquidity policies and risk management framework. This results in the settings of the Individual
In addition, RBS’s US operations meet liquidity requirements set out by the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Financial Industry
Commission (EC), who published a final Delegated Act for the LCR in the
NSFR in October 2014, proposing an implementation date of 1 January 2018, by which time banks are expected to meet an NSFR ratio of 100%.
NSFR in the EU. In the meantime, RBS uses the definitions and proposals from the BCBS paper, and internal interpretations, to calculate
Several regulatory regimes outside the EU where RBS operates, including the Joint Banking Supervisors of the US, have also published consultation papers with guidance for their local implementation of the
LCR. RBS anticipates further guidance for LCR to be published across other jurisdictions during the course of 2015.
In implementing the liquidity risk management framework, a suite of tools are used to monitor, limit and stress test the risks within the balance sheet. The limits control the amount and composition of funding sources, asset and liability mismatches and funding concentrations, in addition to the level of liquidity risk.
Liquidity risks are reviewed at a significant legal entity level daily, and at a business level monthly, with performance reported to Asset and Liability
Management Committees at least monthly. Any breach of internal metric limits will set in motion a series of actions and escalations that could lead to activation of the Contingency Funding Plan (CFP).
RBS actively monitors a range of market-wide and firm-specific early warning indicators of emerging liquidity stresses. Indicators include such areas as customer deposit outflows, market funding costs and movements in the bank’s credit default swap premiums and debt spreads. Early warning indicators and regulatory metrics are reported daily to senior management, including the Chief Financial Officer and
RBS’s liquidity risk appetite is measured by reference to the liquidity portfolio as a percentage of net stressed ILAA outflows.
• Retail and commercial bank deposits - Substantial outflows as RBS
• Intra-day cash flows - Liquid collateral held against intra-day requirement at clearing and payment systems is regarded as encumbered with no liquidity value assumed. Liquid collateral is held against withdrawal of unsecured intra-day lines provided by third parties.
• Intra-group commitments and support - Risk of cash within subsidiaries becoming unavailable to the wider bank and contingent calls for funding on RBS Treasury from subsidiaries and affiliates.
• Off-balance sheet activities - Collateral outflows due to market movements, and all collateral owed by RBS to counterparties but not yet called; anticipated increase in firm’s derivative initial margin requirement in stress scenarios; collateral outflows contingent upon a multi-notch credit rating downgrade of RBS entities; drawdown on committed facilities provided to corporates, based on counterparty type, creditworthiness and facility type; and drawdown on retail commitments.
• Franchise viability - Liquidity stress testing includes additional liquidity in order to meet outflows that are non-contractual in nature, but are necessary in order to support valuable franchise businesses.
The majority of the portfolio is centrally managed by RBS Treasury, ringfenced from the CIB trading book, and is the ultimate responsibility of the
RBS Treasurer. This portfolio is held in the PRA regulated UK Defined
The UK DLG liquidity portfolio accounted for 88% of the total liquidity portfolio, this portion is available to meet liquidity needs as they arise across RBS. The remaining liquidity reserves are held locally within non-
UK bank subsidiaries, the majority of this portion (12%) is restricted by regulatory requirements and therefore assumed to only be available for use locally.
RBS Treasury but are not freely available to other areas of RBS.
RBS efficiently manages the liquidity portfolio to optimise the risk and rewards whilst not compromising its liquidity position. This optimisation can lead to changes in the composition of the portfolio.
Notes: (1) RBS's liquidity risk appetite is measured by reference to the liquidity portfolio as a percentage of stressed contractual and behavioural outflows under the worst of three severe stress scenarios of a market-wide stress, an idiosyncratic stress and a combination of both in RBS's ILAA. This assessment is performed in accordance with PRA guidance. (2) In January 2013, the BCBS issued its revised final guidance for calculating liquidity coverage ratio with a proposed implementation date of 1 January 2015. Within the EU, the LCR is currently expected to come into effect from the later date of 1 October 2015 on a phased basis, subject to the finalisation of the EU Delegated Act. Pending guidance from the PRA, RBS monitors the LCR based on the EU Delegated Act and its internal interpretations of the expected final rules. Consequently RBS’s ratio may change over time and may not be comparable with those of other financial institutions.
Liquidity value 2013 2012 UK DLG (1) CFG Other Total Average Total Average Total Average £m £m £m £m £m £m £m £m £m
Cash and balances at central banks 66,409 1,368 633 68,410 61,956 74,362 80,933 70,109 81,768
Notes: (1) The PRA regulated UK Defined Liquidity Group (UK DLG) comprises RBS’s five licensed deposit taking UK banks: The Royal Bank of Scotland plc, National Westminster Bank Plc, Ulster Bank
may change over time in line with regulatory developments and related interpretations.
Deposits - retail and SME - more stable 206 196 196 186 203 193 95 - retail and SME - less stable 62 56 66 59 66 59 90
Derivative assets - assets equal to derivative liabilities 350 — 286 — 434 — —
Customer loans and advances < 1 year 134 67 144 72 149 75 50
Total assets and undrawn commitments 1,321 361 1,285 370 1,588 443
Notes: (1) Available stable funding and required stable funding. (2) Deferred tax and other liabilities. (3) Prepayments, accrued income, deferred tax, settlement balances and other assets.
As the NSFR calculation has been refined during 2014, some of the weightings on available stable funding and required stable funding have been changed and prior periods restated (on the previously reported basis: 2013 -122%; 2012 - 117%).
US. These deposits form a stable base which fully funds RBS’s customer lending activities.
RBS accesses the wholesale funding markets directly or through its main operating subsidiaries via established funding programmes. The use of different entities to access the market from time to time allows RBS to further diversify its funding mix and in certain limited circumstances demonstrate to regulators that specific operating subsidiaries enjoy market access in their own right.
Overall usage and repayment of available central bank facilities will fit within the overall liquidity risk appetite and concentration limits.
Customer deposits (1) 400 407 372 373 Customer loans and advances (1)
Other liabilities and equity (3) 95 100 64 90 Other assets (3)
The table below summarises the key funding metrics. Short-term wholesale funding (1) Total wholesale funding Net inter-bank funding (2)
By currency GBP USD EUR Other Total GBP USD EUR Other Total £m £m £m £m £m £m £m £m £m £m
Subordinated Total Total notes and CDs bonds liabilities notes in issue in issue
Loan:deposit Funding Loan:deposit Funding Loan:deposit Funding ratio surplus/(gap) ratio surplus/(gap) ratio surplus/(gap)
RBS has access to the short-term money markets to supplement deposit and wholesale funding. RBS’s reverse repos mainly within CIB are generally used to fund repos or to cover short positions. In addition, repos are used to fund a small proportion of CIB’s trading assets and by RBS Treasury as part of the liquidity portfolio management.
The following table shows the residual maturity of financial instruments, based on contractual date of maturity. Held-for-trading (HFT) assets and liabilities have been excluded from the maturity analysis in view of their short-term nature and are shown in total in the table below. Hedging derivatives are included within the relevant maturity bands.
Cash and balances at central banks 82,661 — — — 82,661 — — — 82,661 — 82,661
RBS reviews all assets against the criteria of being able to finance them in a secured form (encumbrance) but certain asset types lend themselves more readily to encumbrance. The typical characteristics that support encumbrance are an ability to pledge those assets to another counterparty or entity through operation of law without necessarily requiring prior notification, homogeneity, predictable and measurable cash flows, and a consistent and uniform underwriting and collection process. Retail assets including residential mortgages, credit card receivables and personal loans display many of these features.
RBS categorises its assets into three broad groups; assets that are: • Already encumbered and used to support funding currently in place via own asset securitisations, covered bonds and securities repurchase agreements.
The table below summarises total on and off-balance sheet assets that are available to support funding and collateral requirements.
Add: - Fair value of securities received as collateral 100.9 124.2
and conduits bonds balances (1) assets (2) assets portfolio Other realisable encumbered £bn £bn £bn £bn £bn £bn % £bn £bn £bn £bn £bn
Reverse repurchase agreements and stock borrowing — — — — — — — — — — 64.7 64.7
Prepayments, accrued income and other assets — — — — — — — — — — 7.6 7.6
Liabilities secured Intra-Group - secondary liquidity (13.1) — — — — (13.1) Intra-Group - other (11.6) — — — — (11.6) Third-party (6) (5.6) (7.1) (39.6) (64.6) (10.5) (127.4) (30.3) (7.1) (39.6) (64.6) (10.5) (152.1)
£bn £bn £bn £bn £bn £bn % £bn £bn £bn £bn £bn
Assets of disposal groups — — — — — — — — — — 0.2 0.2
Liabilities secured Intra-Group - secondary liquidity (19.1) — — — — (19.1) Intra-Group - other (18.4) — — — — (18.4) Third-party (6) (7.8) (9.0) (42.7) (85.1) (6.0) (150.6) (45.3) (9.0) (42.7) (85.1) (6.0) (188.1)
Notes: (1) Includes cash, coin and nostro balance held with the Bank of England as collateral against deposits and notes in circulation. (2) Encumbered assets are those that have been pledged to provide security for the liability shown above and are therefore not available to secure funding or to meet other collateral needs. (3) Unencumbered readily realisable assets are those assets on the balance sheet that can be readily used to meet funding or collateral requirements and comprise: (a) Liquidity portfolio: cash balances at central banks, high quality debt securities and loans that have been pre-positioned with central banks. In addition, the liquidity portfolio includes securitisations of own assets which has reduced over the years and has been replaced by loans. (b) Other readily realisable assets: including assets that have been enabled for use with central banks; and unencumbered debt securities.
(4) Unencumbered other realisable assets are those assets on the balance sheet that are available for funding and collateral purposes but are not readily realisable in their current form. These assets include loans that could be prepositioned with central banks but have not been subject to internal and external documentation review and diligence work.
Credit risk is the risk of financial loss due to the failure of a customer or counterparty to meet its obligation to settle outstanding amounts.
Credit quality and impairment - RBS’s credit risk portfolio continued to improve with an overall reduction in exposure, an improvement in credit quality and a material provision release in 2014. These improvements were driven by supportive economic and market conditions in the UK and
Ireland, better liquidity and increased collateral values, and also reflected improvements in credit risk measurement. Through the credit risk appetite frameworks the credit risk management function maintained a continued focus on key portfolios and concentrations.
Republic of Ireland with an increasing trend towards customers opting for longer-term solutions (though mortgage recoveries stock remains high).
CFG - 2014 was a year of growth in both the personal and wholesale
CFG’s and RBS’s risk governance frameworks, so that risks are understood and accepted. Refer to Segment performance - Citizens
Oil prices - In the second half of 2014, oil prices reduced significantly, driven by the growth in supply from non-OPEC producers, the return of supply from Libya, Iran and Iraq and reduced demand expectations from
Russia/Ukraine - Ongoing tensions in Russia and Ukraine as well as the imposition of sanctions, particularly in the oil and gas, defence, and financial sectors, have adversely affected the credit risk profile of customers who have exposure to or dealings with Russian or Ukrainian entities. Accordingly, RBS reduced limits to customers affected by those developments, including tightening transactional controls to mitigate credit risk while ensuring sanctions compliance. For further information regarding exposure to Russia, refer to the Country risk section on page
Credit risk appetite - Credit risk appetite is continuously reviewed to ensure that it remains relevant in light of changing economic conditions and strategic objectives. Revisions were made to the sector credit risk appetite framework to reflect the altered composition of the credit portfolio following the creation of RCR. The asset and product class framework was also revised to reflect changes in the portfolio together with market developments. These included a revision of the credit risk appetite framework relating to sponsor owned corporate transactions in order to maintain portfolio credit quality following a weakening in terms and conditions within the leverage market.
A strong credit risk management function is vital to support ongoing profitability. The potential for loss is mitigated through a robust credit risk culture and a focus on sustainable lending practices.
Chief Credit Officer (GCCO), acts as the ultimate authority for the approval of credit and is responsible for ensuring that credit risk is within the risk appetite set by the Board. The function is also responsible for managing concentration risk and credit risk control frameworks as well as developing and ensuring compliance with credit risk policies. In addition, the function conducts RBS-wide assessments of provision adequacy.
Credit Risk Committee (CRC) to act on credit risk matters. These include, but are not limited to, credit risk appetite and limits (within the overall risk appetite set by the Board and the ERF), credit risk strategy and frameworks, credit risk policy and the oversight of the credit profile across
RBS. There are separate CRCs for the wholesale and personal portfolios.
Chief Risk Officer or the GCCO, approves recommendations from lowerlevel provisions committees, which in turn have delegated approval thresholds for certain provision adequacy decisions.
Key trends in the credit risk profile of RBS’s performance against limits and emerging risks are set out in the RBS Risk Management Monthly
Report provided to the Executive Committee, the Board Risk Committee and the Board.
The third component of RBS credit assurance framework is the credit quality assurance activity carried out independently by Risk Assurance, which is part of the Risk Infrastructure function. Risk Assurance independently reviews lending activities to identify control breaches, assess portfolio quality and recommend process improvements. These findings are escalated to senior management and plans to address shortcomings are recorded and tracked in RBS’s operational risk system.
Internal Audit (IA) function. IA provides assurance to the Audit Committee and senior executive that the main business risks have been identified and that effective controls are in place to manage these risks.
RBS credit risk management is split into wholesale and personal, reflecting the distinction between business types and the different risk management approaches, metrics and issues these involve. Wholesale focuses on activities with corporate and SME customers as well as banks and financial institutions (these customers tend to be grouped by sector and geography as well as by product/asset class). Personal covers personal customers across UK PBB, Ulster Bank and CFG as well as personal lending activities in Private Banking.
For further information refer to the Wholesale credit risk management and
A key aspect of credit risk management relates to problem debt management, from early problem identification through to litigation and recovery of cash when there is no realistic potential for rehabilitation.
RBS segments them according to product type, such as credit cards, personal loans and mortgages. The approach taken to assess impaired assets in collections differs from the approach taken to assess those in recoveries. For further details on the collections and recoveries functions refer to the Problem debt management sub-section on page 258.
The wholesale calculation is based on similar principles but there is no segmentation into portfolios. PDs and LGDs are calculated individually.
RBS reviews its portfolios of available-for-sale financial assets for evidence of impairment, which includes: default or delinquency in interest or principal payments; significant financial difficulty of the issuer or obligor; and increased likelihood that the issuer will enter bankruptcy or other financial reorganisation. However, the disappearance of an active market because an entity’s financial instruments are no longer publicly traded is not evidence of impairment. Furthermore, a downgrade of an entity’s credit rating is not, in itself, evidence of impairment, although it may be evidence of impairment when considered with other available information. A decline in the fair value of a financial asset below its cost or amortised cost is not necessarily evidence of impairment. Determining whether evidence of impairment exists requires the exercise of management judgement. Unrecognised losses on RBS’s available-forsale debt securities are concentrated in its portfolios of asset-backed securities. Such losses reflect the widening of credit spreads as a result of the reduced market liquidity in these securities and the current uncertain macroeconomic outlook in the US and Europe. The underlying securities remain unimpaired.
Key assumptions relating to impairment levels of unsecured lending relate to economic conditions and the interest rate environment, which have a direct impact on customers' debt servicing capabilities. For individual impairments greater than £1 million, oversight is provided by the Provisions Committee.
Impaired loans and receivables are written-off, that is, the impairment provision is applied in writing down the loan's carrying value partially or in full, when there is no longer any realistic prospect of recovery of part or all of the loan. For loans that are individually assessed for impairment, the timing of write-off is determined on a case-by-case basis. Such loans are reviewed regularly and write-offs may be prompted by bankruptcy, insolvency, forbearance and similar events.
• Commercial loans: Write-off generally occurs within five years but is determined in the light of individual circumstances.
RBS uses a range of measures for credit risk exposures. The internal measure used, unless otherwise stated, is credit risk assets (CRA)
consisting of: • Lending exposure - measured using drawn balances and includes cash balances at central banks and loans and advances to banks and customers (including overdraft facilities, instalment credit and finance leases).
• Contingent obligations - measured using the value of the committed amount and including primarily letters of credit and guarantees.
RBS uses the output of credit risk models in the credit approval process, as well as for ongoing credit risk assessment, monitoring and reporting, to inform credit risk appetite decisions. These models may be divided into three categories: Probability of default (PD)
• Personal models - Each customer account is scored and models are used to assign a PD. Inputs vary across portfolios and include both internal account and customer level data, as well as data from credit bureaus. This score is used to support automated credit decisionmaking through the use of a statistically-derived scorecard.
EAD models provide estimates of credit facility utilisation at the time of a customer default, recognising that customers may make further drawings on unused credit facilities prior to default or that exposures may increase due to market movements. Regulatory requirements stipulate that EAD
LGD models estimate the amount that cannot be recovered in the event of customer default. When estimating LGD, RBS’s models assess both borrower and facility characteristics, as well as any credit risk mitigants.
The cost of collections and a time-discount factor for the delay in cash recovery are also incorporated.
The credit economic capital model is a framework that allows for the calculation of portfolio credit loss distributions and associated metrics over a given risk horizon for a variety of business purposes.
Risk mitigation techniques are used in the management of credit portfolios across RBS, typically to mitigate credit concentrations in relation to an individual customer, a borrower group or a collection of related borrowers. Where possible, customer credit balances are netted against obligations.
Balance the scope of the scope Credit and Disposal and sheet market risk (1) of CRA (2) adjustments (3) collateral (4) groups (5) reclassifications (6) CRA
Cash and balances at central banks 82.7 — (3.9) — — — 1.7 80.5
Reverse repurchase agreements and stock borrowing 76.4 — (76.4) — — — — —
Notes: (1) The exposures in regulatory trading book businesses are subject to market risk and are hence excluded from CRA. Refer to the Market risk section on page 298. (2) Includes cash in ATMs and branches, reverse repurchase agreements, securities and other assets (refer to note below). (3) Includes impairment loss provisions related to loans and advances and credit valuation adjustment on derivatives. (4) Comprises: - Loans and advances: cash collateral pledged with counterparties in relation to net derivative liability positions. - Derivatives: impact of master netting arrangements.
(5) Amounts reclassified to balance sheet lines. (6) Primarily includes: - Loans and advances: cash management pooling arrangements not allowed under IFRS. - Derivatives: differences between netting arrangements and regulatory model sets and balances with central counterparties after netting but before variation margin presented net on the balance sheet.
Personal Wholesale Total Total Personal Wholesale Total Total Personal Wholesale Total Total
• RCR was established on 1 January 2014 and the most capital intensive, highest-risk assets from across RBS were transferred into it. As part of this process, certain assets which were previously managed as Non-Core were returned to the non-RCR businesses.
Banking partially offset by a 7% reduction in Private Banking, where the largest reduction in exposure in wholesale was in the banking sector and the remainder of the reduction predominantly driven by personal lending
• Personal exposure grew by 2% during 2014. This was driven predominantly by growth in UK PBB’s mortgage book as well as a rise in CFG’s mortgage and auto finance exposures. For further analysis of the personal portfolios refer to pages 258 to 273.
• There has been a significant increase in CFG exposure in both the personal and wholesale portfolios, as well as across a broad range of industry sectors, in line with business strategy and risk appetite.
Growth in personal CRA was driven by increases in auto finance and residential mortgages, following portfolio acquisitions during the year, partially offset by a reduction in home equity exposures, including continued run-off in the non-performing portfolio. In addition foreign exchange movements also affected the CFG
• Central items predominantly represent RBS Treasury’s exposures to central banks in the UK and US. Central items exposure fell 6%
during the year, predominantly in the UK and Western Europe, driven by RBS’s liquidity requirements and cash positions.
• At the year end, RCR accounted for 5% of total CRA (2013 Non-
Core - 8%) as asset disposals and run-offs continued. 50% of RCR
The table below details CRA by business type and geographical region. Geographical region is based on the location of the customer’s operations (or, in the case of individuals, location of residence).
UK (excl. UK) America Pacific America Other (1) Total excluding RCR RCR
• There was no material change in wholesale sector distribution during the year, with proportionate reductions observed throughout the portfolio.
• For the wholesale portfolio, sector analysis on a geographic basis can be found on page 246. Information on personal portfolios can be found on pages 258 to 273.
Credit grades play a key role in the internal reporting and oversight of
is less than 100%) and non-performing loans as AQ10 (where the PD is
Exposures are allocated to asset quality bands on the basis of statistically driven models, which produce estimates of default rates. The variables included in the models vary by product and geography. For portfolios secured on residential property, these models typically include measures of delinquency and loan-to-value as well as other differentiating characteristics such as product features or account performance information.
• The proportion of exposure in the AQ10 band fell to 5% of the total portfolio, driven by the disposal strategy in RCR and the improving economic climate which also drove lower impairments during the year.
• Overall asset quality for performing assets improved year-on-year with AQ1-AQ4 increasing overall by 6%. AQ1-AQ4 represented 60%
• The reduction in the proportion of non-RCR exposures in the AQ1 band reflected the reduction in exposure to sovereigns, as well as changes to the large corporate grading models. The updated calibrations associated with these new models resulted in rating migrations from higher to lower quality AQ bands, mostly in bands
December 2014, 14% of RBS’s exposure was graded using these models and 64% had been re-rated using the revised models.
Approximately 40% of re-rated large corporate customers retained their existing AQ band, with 40% moving down one AQ band and 15% moving down two AQ bands.
• The increase in AQ4 was caused by the recalibration of models for
UK personal mortgages to reflect continued improvements in observed default rates and the implementation of the large corporate grading model.
SNC excesses are reviewed on a gross basis as well as on a net basis after taking mitigation into account. All net excesses are managed through an approved, customer specific, exposure management plan. To reduce its SNC exposures, RBS may decide to sell excess amounts or rely on mitigation. To be considered effective under the framework, mitigation must be “eligible”. Examples of eligible credit risk mitigants include cash collateral, government or bank guarantees, credit default swaps or trade insurance. Eligible credit risk mitigants must also be structurally effective, legally certain, enforceable and characterised by an appropriate maturity profile.
decrease in the number of excesses. The top ten SNC excesses comprise 95% of RBS’s total SNC excesses. Total SNC exposure was reduced by 43%.
Sector concentration risk is the risk of an outsized loss arising from a concentration of credit risk to customers in the same sector or across sectors that are susceptible to similar stress events. The sector concentration framework enables RBS to manage this risk and acts as one of the primary mechanisms for cascading the board-approved risk appetite to business franchises. It also details the controls for managing and reporting credit exposure to industry sectors.
The reviews consider the risks inherent in each product or asset class, the risk controls applied, monitoring and reporting of the risk, the client base, and any emerging risks to ensure risk appetite remains appropriate.
The Group Chief Credit Officer has established a framework of individual delegated authorities, which are set out in the RBS Credit Risk Policy.
Both must hold appropriate delegated authority, which is dependent on their experience and expertise. Only a small number of senior executives hold the highest authority provided under the framework. While both parties are accountable for the quality of each decision taken, the credit risk approver holds ultimate sanctioning authority.
Assessments of credit risk must, at a minimum, specifically address the following elements: • The amount, terms, tenor, structure, conditions, purpose and appropriateness of all credit facilities; • Compliance with applicable RBS-wide and/or franchise-level credit policies; • The customer’s ability to meet obligations, based on an analysis of financial information and a review of payment and covenant compliance history; • The source of repayment and the customer’s risk profile, including its sector and sensitivity to economic and market developments, and any credit risk mitigation; • Refinancing risk - the risk of loss arising from the failure of a customer to settle an obligation on expiry of a facility through the drawdown of another credit facility provided by RBS or by another lender; • Consideration of other risks such as environmental, social and ethical, regulatory and reputational risks; and
RBS mitigates credit risk through the use of netting, collateral and the use of market standard documentation.
• Other physical assets - These may include stock, plant, equipment, machinery, vehicles, ships and aircraft. Such assets are suitable collateral only if RBS can identify, locate, and segregate them from other assets on which it does not have a claim. RBS values physical assets in a variety of different ways, depending on the type of asset concerned and may rely on balance sheet valuations in certain cases.
Each segment has defined early warning indicators (EWIs) to identify customers experiencing financial difficulty, and to increase monitoring if needed. EWIs may be internal, such as a customer’s bank account activity, or external, such as a publicly-listed customer’s share price. If
EWIs show a customer is experiencing potential or actual difficulty, credit officers within the business franchise may decide to place the customer on the Watchlist.
Once on the Watchlist, depending on the severity of the financial difficulty and the size of the exposure, the customer relationship strategy is reassessed by credit officers, by specialist credit risk or relationship management units in the relevant business or by Restructuring. In accordance with RBS-wide policies, a number of mandatory actions are taken, including a review of the customer’s credit grade and facility and security documentation.
Appropriate corrective action is taken when circumstances emerge that may affect the customer’s ability to service its debt. Such circumstances include deteriorating trading performance, imminent breach of covenant, challenging macroeconomic conditions, a late payment or the expectation of a missed payment.
For all Watch Red cases, credit specialists in the relevant business are required to consult with their counterparts in Restructuring on whether the relationship should be transferred to Restructuring (for more information on Restructuring, refer to the section below). Watch Red customers that continue to be managed by the business tend to be those requiring subject matter expertise that is available in the business rather than in
Remediation strategies available in the business include granting a customer various types of concessions. Any decision to approve a concession will be a function of specific country and sector appetite, the credit quality of the customer, the market environment and the loan structure and security. For further information, refer to the Forbearance section below.
Other potential outcomes of the relationship review are to: take the customer off the Watchlist; offer additional lending and continue monitoring; transfer the relationship to Restructuring if appropriate; or exit the relationship altogether.
The specialists conduct a detailed assessment of the viability of the business, as well as the ability of management to deal with the causes of financial difficulty, focusing on both financial and operational issues.
Following the assessment, various options are discussed with the customer (which may involve debt restructuring or forbearance or both)
(for a new customer), or reflect improving credit market conditions for the customer, are not considered forbearance.
Debt forgiveness can be used for stressed corporate transactions and are typically structured on the basis of projected cash flows from operational activities, rather than underlying tangible asset values.
The contractual margin may be amended to bolster the customer’s dayto -day liquidity to help sustain its business as a going concern. This would normally be a short-term solution. As set out above, RBS would seek to obtain a return commensurate to the risk that it is required to take and this can be structured as set out above.
A temporary covenant waiver, a recalibration of covenants or a covenant amendment may be used to cure a potential or actual covenant breach.
Where RBS holds collateral or other security interest and is entitled to enforce its rights, it may enforce its security or otherwise take control of the assets. The preferred strategy is to consider other possible options prior to exercising these rights.
Insolvency may be the only option that ensures that the assets of the business are properly and efficiently distributed to relevant creditors.
Wholesale loans granted forbearance are individually assessed in most cases and are not therefore segregated into a separate risk pool.
These are re-assessed prior to finalising any forbearance arrangement in light of the loan’s amended terms and any revised grading incorporated in the calculation of the impairment loss provisions for RBS’s wholesale exposures.
Credit Risk function in Restructuring. When no further losses are anticipated and the customer is expected to meet the loan’s revised terms, any provision is written-off and the balance of the loan returned to performing status. This course of action is not dependent on a specified time period and follows the credit risk manager’s assessment that it is appropriate.
This reflected a better economic environment as well as improvements in asset values in core markets.
The table below details CRA by sector and geographical region for the wholesale portfolio. Sectors are based on RBS’s sector concentration framework.
• The banking sector was one of the largest in the portfolio with exposure totalling £41.6 billion. Exposures were well diversified geographically and limits are controlled through a combination of the single name concentration framework, credit policies and country limits. Overall exposure did not change materially, with the decrease in Asia Pacific (largely driven by a reduction in lending in China)
partially offset by increases in North America, Western Europe and the UK. Derivatives continued to generate the largest exposure for banks (70% of credit risk assets in the banks sector).
• The majority of property exposure was CRE related in Ireland and the UK (refer to the CRE section on page 251 for further details).
• A key protection for RBS is the minimum security covenant. The overall loan-to-value (LTV) on the portfolio was 77% .The LTV for the RCR portfolio was 92% and for the remaining portfolio was 73%.
In the CIB portfolio, approximately 20% of the portfolio had LTVs
• Exposure to the manufacturing sector increased by 7% driven predominantly by increases in the industrials and agriculture subsectors which increased by 10% and 9% respectively during the year.
• Trends in the wholesale non-performing credit risk exposures in 2014 were predominantly driven by the RCR portfolio which accounted for 74% of the AQ10 CRA.
• Excluding RCR less than 2% of wholesale exposure was rated
• Property and in particular CRE continued to be the largest sector in wholesale non-performing assets - 68% of total AQ10 exposure
• Shipping represented 3.7% of wholesale non-performing assets, largely unchanged from 2013.
RCR Non-Core Non-Core Total Non-Core Non-Core Total £m £m £m £m £m £m £m
• The number of Watchlist Red customers decreased significantly in 2014 as a result of the transfer of exposures to RCR. Customers managed in RCR are subject to heightened scrutiny and regular review against specific disposal plans. A breakdown of the asset quality of the RCR portfolio is provided on page 240.
The table below shows the value of loans (excluding loans where RBS has initiated recovery procedures) where forbearance was completed during the year, by sector and type. 2014 2013 2012
Note: (1) Provision coverage reflects impairment provision as a percentage of non-performing loans.
Credit risk continued Forbearance arrangements The table below shows the incidence of the main types of wholesale forbearance arrangements by loan value.
(2) The main types of ‘other’ concessions include formal ‘standstill’ agreements and release of security.
• Forbearance completed on loans decreased during 2014 compared with 2013. This was in line both with improving market conditions and the RCR disposal strategy.
• Loans totalling £4.3 billion were granted credit approval for forbearance but had not yet reached legal completion at 31
December 2014 (2013 - £9.4 billion). These loans are referred to as
• Forbearance in the transport sector was historically driven by exposure to shipping. There has been lower forbearance in the shipping portfolio in 2014 as asset values have improved, reducing the instances of minimum security covenant breaches.
During 2014, an RBS-wide centre of excellence was created to develop, implement and oversee risk management strategy for this portfolio. The centre of excellence is responsible for the management of CRE credit risk, including setting CRE-specific credit risk appetite, credit policies and portfolio controls as well as oversight of valuations, environmental and flood appraisals. This sector is reviewed regularly at the Credit Risk Committee (CRC)
and Executive Risk Forum (ERF) due to its relative size and riskiness. Both CRC and ERF monitor the performance of the portfolio to ensure it remains in line with expectations relative to credit quality, capital consumption and control framework compliance.
Ongoing credit risk management is supported by dedicated credit teams covering the CPB and CIB portfolios, a team specialising in commercial and residential property developments, and senior underwriters sanctioning the most sizeable and complex CRE exposures.
Commercial Residential Commercial Residential Total RCR RCR RCR RCR Total £m £m £m £m £m £m £m £m £m £m
Notes: (1) Data at 31 December 2014 includes CRE lending from Private Banking in CPB of £1.3 billion that was excluded from 2013 and 2012 data. At 31 December 2013 CRE lending in Private Banking totalled £1.4 billion (2012 - £1.4 billion). (2) ROI: Republic of Ireland; NI: Northern Ireland; RoW: Rest of World.
• The increase in US exposure was predominantly driven by improved economic conditions, which contributed to increased business volumes in CFG, in line with risk appetite and business strategy.
• Reductions in the Ulster Bank less than one year band between 2013 and 2014 are predominantly the result of transfers to RCR.
• The increase in AQ3-AQ4 exposure was predominantly driven by new lending in CFG and Commercial Banking.
The market value of the collateral typically exceeds the loan amount at origination date. The market value is defined as the estimated amount for which the asset could be sold in an arm’s length transaction by a willing seller to a willing buyer. External valuations for CRE lending are required at the inception of the loan. In addition to external valuations at inception, RBS uses a range of other types of information to value such collateral, including expert judgement and indices. External valuations may be sought should an adverse credit event occur - this requirement is assessed as part of the
• Interest on performing investment property secured loans was covered 1.6x and 2.9x within RCR and RBS excluding RCR, respectively. Performing loans include general corporate loans, typically unsecured, to CRE companies (including real estate investment trusts), and major UK house builders, in addition to facilities supported by guarantees. The credit quality of these exposures was consistent with that of the performing portfolio overall. Non-performing loans are subject to standard provisioning policies.
Credit quality Credit quality metrics relating to CRE lending were as follows: Total RCR Non-Core
REIL as a % of gross loans to customers 30.8% 38.3% 35.1% 88.5% 74.0% 64.5%
RBS has £10.7 billion of credit risk assets (CRA) to the oil and gas sector. Including committed but undrawn facilities, the exposure to the sector is £24.1 billion.
The price of crude oil is subject to global demand and supply factors and therefore determined globally. It has fallen by more than 50% since June 2014. This steep decline has been driven by excess supply fears resulting from a combination of factors. These include the growth in US
shale production and OPEC maintaining current production levels, as well as weaker demand in Europe and slower growth in China.
The price of natural gas is determined regionally. US natural gas prices have been relatively stable compared with the recent price of crude oil.
During 2014, CFG’s exposure to this sector increased, partly due to the transfer of £0.4 billion (total exposure) of oil and gas exposures from CIB.
RBS had no high-yield bond underwriting positions as at 31 December 2014; it had a simple sub investment grade loan underwriting of $86 million in the Americas which, subsequent to year end, had been syndicated.
The tables below provide a breakdown of CIB’s oil and gas sector exposure - which represents 84% of RBS’s exposure to this sector
Producers (incl. integrated oil companies) 833 1,101 4,822 263 115 848 7,982
Of which: exploration and production 145 3 3,118 115 150 37 3,568
customers represent approximately 18% of CIB’s exposure to the oil and gas sector and OFS customers represent 15%.
E&P is most immediately exposed to the oil price decline and E&P
The impact of continuing low oil prices on the credit quality of the portfolio is subject to ongoing review, including stress testing. RBS is in regular contact with customers to understand the impacts on them of a sustained low oil price. This activity is backed up by a suite of early warning indicators used to identify customers who may be experiencing financial difficulty.
Collateral may consist of either cash or securities. In the case of derivatives, collateral generally takes the form of cash. In the case of securities financing transactions, collateral usually takes the form of debt and, to a much lesser extent, equity securities at the outset. However, if the value of collateral falls relative to that of the obligation, RBS may require additional collateral in the form of cash (variation margin). The vast majority of agreements are subject to daily collateral calls with collateral valued using RBS’s internal valuation methodologies.
Personal credit risk management focuses on RBS’s personal customers in UK PBB, Ulster Bank and CFG as well as personal lending activities in
RBS uses a product and asset class framework to control credit risk for its personal businesses. The framework sets limits that measure and control, for each relevant franchise or reportable segment, the quality of both existing and new business. The actual performance of each portfolio is tracked relative to these limits and action taken where necessary.
RBS takes collateral in the form of residential property to mitigate the credit risk arising from mortgages and home equity lending. RBS values residential property during the loan underwriting process by either appraising properties individually or valuing them collectively using statistically valid models. RBS updates residential property values quarterly using the relevant residential property index, namely the Halifax
Quarterly Regional House Price Index in the UK, the Case-Shiller Home
Price Index in the ROI, and the Nationwide House Price Index in Northern
Forbearance is granted principally to customers with mortgages and less frequently to customers with unsecured loans.
Forbearance options include, but are not limited: • Payment concessions - A temporary reduction in, or elimination of, the periodic (usually monthly) loan repayment is agreed with the customer. At the end of the concessionary period, forborne principal and accrued interest outstanding is scheduled for repayment over an agreed period. Ulster Bank and CFG also offer payment concessions in the form of discounted interest rates that involve the forgiveness of some interest.
• Term extensions - The maturity date of the loan is extended.
• Interest only conversions - The loan converts from principal and interest repayment to interest only repayment on a permanent or, in
Forborne loans may be either performing or impaired and are subject to the same impairment triggers as the rest of the portfolio (refer to impairment section). A loan is deemed impaired if the borrower has failed to make repayments of principal, payments of interest or both for 90 days or more, or in the case of forborne loans, the borrower has been granted a payment concession such as interest forgiveness.
The granting of forbearance does not generally change the delinquency status of the loan affected. An exception is a loan for which RBS has agreed to capitalise arrears. Capitalisation of principal and interest in arrears brings the loan up to date. If it remains up to date for six months and is deemed likely to continue to do so, it is transferred to the performing book. In Ulster Bank, if a customer makes payments that reduce loan arrears below 90 days, the loan is transferred to the performing book. In addition, a small portfolio of loans past due 90 days is managed by PBB’s collections function. Loans in this portfolio may also be transferred to the performing book if the customer makes payments that reduce arrears below 90 days. In CFG, all forborne loans are included in the non-performing book regardless of whether or not
Provisions for all non-performing personal loans are collectively assessed. The loans are grouped by asset type. Characteristics such as
LTVs, arrears status and default vintage are also considered when assessing recoverable amount and calculating the related provision requirement. Ulster Bank personal non-performing loans in the Republic of Ireland form a separate risk pool where specific LGDs are allocated using observed performance of these loans. While non-performing forbearance personal loans in the UK (10% of portfolio) do not form a separate risk pool, the LGD models used to calculate the collective impairment provision are affected by forbearance agreements.
In CFG, personal loans subject to forbearance are assessed individually, taking into account the value of any collateral, for impairment loss throughout their lives until repaid or fully written off. If there is no collateral the impairment amount considers the excess of the loans’
Once a loan has been identified as impaired it is managed by recoveries teams in the relevant businesses. They seek to reduce RBS’s loss by maximising cash recovery while treating customers fairly. Where an acceptable repayment arrangement cannot be agreed with the customer litigation may be considered. In the UK and Northern Ireland, no repossession procedures are initiated until at least six months following the emergence of arrears (in the Republic of Ireland, regulations prohibit taking legal action for an extended period). Additionally, certain forbearance options are made available to customers managed by the recoveries function.
Ulster Bank was a significant driver of this decrease as a result of the better economic environment and higher asset prices, which led to the release of credit impairments during the year. Outside of Ulster Bank, impairments in the UK portfolio decreased which also saw provision releases owing to rising asset prices and strong recoveries. The level of new impairments in the UK portfolio decreased by 26% compared to 2013.
Private Private UK PBB Ulster Bank Banking CFG Total UK PBB Ulster Bank Banking CFG Total £m £m £m £m £m £m £m £m £m £m
Total gross personal lending of £115.6 billion comprised 64% of RBS’s gross personal lending of £179.8 billion. £103.2 billion related to mortgage lending and £12.3 billion to other lending (loans, credit cards and overdrafts).
The table below shows LTVs for the UK PBB residential mortgage portfolio split between performing (AQ1-AQ9) and non-performing
Performing performing Total IOL (1) Performing performing Total IOL (1) Performing performing Total IOL (1)
Average LTV on new originations during the year (3) 71% 67% 65%
• The UK personal mortgage portfolio increased by 4% to £103.2 billion, of which £91.6 billion (2013 - £90.3 billion) was owneroccupied and £11.6 billion (2013 - £9.0 billion) buy-to-let.
• Fixed interest rate products of varying time durations accounted for approximately 56%, with 3% a combination of fixed and variable rates and the remainder variable rate. Approximately 19% of owneroccupied mortgages were on interest only terms with a bullet repayment and 7% were on a combination of interest only and capital and interest.
• During 2014 buy-to-let balances increased by £2.6 billion (28.2%) in support of UK PBB’s growth strategy with new business subject to rental cover and loan-to-value risk appetite requirements.
Approximately 63% of buy-to-let mortgages were on interest only lending terms with a bullet repayment, 34% repayable by regular capital and interest repayments and the remaining 3% a combination of interest only and capital and interest. Buy-to-let lending includes lending to customers who were originally owner occupiers who subsequently, with the agreement of RBS, let out the property to a third party, this represents 26.5% of buy-to-let mortgages.
Within owner-occupied, the average LTV by weighted value improved from 61.6% to 57.0% and within buy-to-let from 66.0% to 59.6%.
• Gross new mortgage lending of £19.7 billion (2013 - £14.4 billion)
• There was an overall release of impairment provision of £26 million.
This compares to a charge of £31 million in 2013 and reflects improvements in underlying asset quality, including house price increases.
The incidence of the main types of personal forbearance on the balance sheet are analysed below.
• At 31 December 2014, forbearance balances where the forbearance treatment was provided in the last 24 months amounted to £1.2 billion, representing 1.2% of total mortgage stock.
• Since January 2008, 4.7% of total mortgage assets (£4.9 billion)
• The majority (91%) of UK PBB forbearance is permanent in nature
• Approximately 85% of forbearance loans (2013 - 85%) were up to date with payments compared with approximately 98% of assets not subject to forbearance activity. The impairment provision cover on forbearance loans remained significantly higher than that on assets not subject to forbearance as a result of a bespoke provisioning methodology.
Notes: (1) 2015 includes pre-2015 maturity exposure. (2) Includes £1.6 billion (2013 - £1.8 billion) of repayment mortgages that have been granted interest only concessions (forbearance). (3) 2014 includes pre-2014 maturity exposure.
Bullet principal Bullet principal repayment Other Total repayment Other Total £m £m £m £m £m £m
Customers are reminded of the need to have an adequate repayment vehicle in place during the mortgage term.
• Customers may be offered an extension to the term of an interest only mortgage or a conversion of an interest only mortgage to one featuring repayment of both capital and interest, subject to affordability and characteristics such as the customers' income and ultimate repayment vehicle. These term extensions are considered forbearance and are subject to a bespoke provision methodology resulting in a higher provision rate.
December 2014 (2013 - £13.8 billion). Credit card balances fell by 14.1 %
The impairment charge on unsecured lending was £241 million for the year, down 17.6% on 2013. The reduction reflects continued strong underlying credit quality together with fortuitous recoveries from aged defaulted debt.
Arrangements for the repayment of overdraft excesses or loan arrears can be agreed dependent on affordability. Where repayment arrangements are not affordable debt consolidation loans can be provided to customers in collections. £100 million of balances (0.83% of the total unsecured balances) were subject to forbearance at the 2014 year end.
Non- Of which: Non- Of which: Non- Of which: Loan-to-value ratio by value
Average LTV on new originations during the year (2) 75% 73% 74%
• Of Ulster Bank’s portfolio of £17.5 billion, 86% was in the Republic of Ireland and 14% in Northern Ireland. At constant exchange rates, the portfolio decreased 2.4% during the year as a result of amortisation.
• The average LTV of new business for owner occupier mortgages was 75%, compared to 69% for buy-to-let.
• Indexed loan to value, excluding 2014 new business, was 93% as at
• REIL increased from £3.2 billion to £3.4 billion primarily reflecting higher forbearance arrangements. Provision coverage was lower at 41% (2013 - 53%) reflecting an increase in collateral values.
Notes: (1) Includes £77 million of loans (2013 - £365 million; 2012 - £10 million) where an interest rate discount has been agreed resulting in a reduction of contractual cash flows through forgiveness of interest. (2) As an individual case can include more than one type of arrangement, the analysis above exceeds the total value of cases subject to forbearance.
The table below shows forbearance agreed during the year split between performing and non-performing. 2014 2013 2012 £m £m £m
(unchanged from 2013); and iii) economic concessions - 20% (2013 - 13%). Economic concessions are offered for periods up to eight years and incorporate different levels of repayment based on customer circumstances.
• The remaining forbearance loans were short-term arrangements accounting for 39% of the forbearance portfolio.
• Payment concessions represented the remaining 31%, comprising: arrangements where payments amortised the outstanding balance
The tables below show interest only mortgage portfolios (excluding mixed repayment mortgages) by type and by contractual year of maturity.
The table below shows the arrears status of the personal mortgage portfolio by mortgage type.
• Ulster Bank’s interest only mortgages require full principal repayment (bullet) at the time of maturity; or payment of both capital and interest from the end of the interest only period, typically seven years, so that customers meet their contractual repayment obligations. For bullet customers, contact strategies are in place to remind them of the need to repay principal at the end of the mortgage term.
• Typically interest only mortgages have a remaining term of 16 years.
The impairment charge on unsecured lending was £19.9 million for the year, down 12% on 2013.
The majority of the Private Banking personal lending portfolio relates to mortgage lending. Total gross lending of £14.1 billion comprised 7.8% of
Forbearance is offered to private banking customers on a limited basis and represents less than 1.1% of the total mortgage portfolio. The main types of forbearance offered are in the form of term extensions.
Term extensions - capital repayment and interest only 46 29 27
Note: (1) As an individual case can include more than one type of arrangement, the analysis above exceeds the total value of cases subject to forbearance.
Credit risk continued The table below shows forbearance agreed during the year split between performing and non-performing.
The table below shows interest only mortgages by interest rate and repayment type.
2014 £m £m £m £m £m £m £m £m 2013 £m £m £m £m £m £m £m £m
The table below shows the arrears status of Private Banking’s personal mortgage portfolio by mortgage type.
Loan-to-value ratio by value (1) £m £m £m £m £m £m £m £m £m £m £m £m
Average LTV on new originations during the year (4) 68% 68% 64%
• The mortgage portfolio consisted of £7.8 billion of residential mortgages (1% in second lien position) and £13.3 billion of home equity loans and lines of credit (HELOC) - first and second liens.
Home equity consisted of 45% in first lien position. A Serviced By
• The overall mortgage portfolio credit characteristics are stable with a weighted average LTV of 67% at 31 December 2014. The weighted average LTV of the portfolio, excluding SBO, was 65%.
No missed payments 1-3 months in arrears >3 months in arrears Total
• CFG participates in the US-government mandated Home Affordable Modification Program, as well as its own proprietary programme. Both feature a combination of term extensions, capitalisations of arrears, interest rate reductions and loan conversions from interest only to amortising. These tend to be permanent changes to contractual terms. In order to qualify for either of these programmes, customers must meet government-specified or internal criteria that provide evidence of financial difficulty and demonstrate a willingness to pay. The 12-month default rate, on a value basis, for forbearance was 15% in 2014.
The table below shows the interest only mortgage and HELOC portfolios by interest rate and repayment type.
The table below shows the interest only mortgage and HELOC portfolios (excluding mixed repayment mortgages) by type and contractual year of 2014 £m £m £m £m £m £m £m £m 2013 £m £m £m £m £m £m £m £m
June 2014, 48.9% had been fully repaid by 31 December 2014. The unpaid balance totalled £103 million, 90.8% of which continued to meet agreed payment arrangements. Of the amortising loans that matured in the six months to 30 June 2014, 64.3% had been fully repaid by 31 December 2014. The unpaid balance totalled £15 million, 83.2% of which continued to meet agreed payment arrangements.
For loans secured by vehicles and credit cards, CFG may offer temporary interest rate modifications, but no principal reductions. Forbearance may also be offered to student loan customers consistent with the policy guidelines of the US Office of the Comptroller of the Currency. £140 million (1.3% of the unsecured balances) were subject to forbearance at 31 December 2014 (includes auto and recreational vehicle marine portfolios and excludes small business loans as these are included as part of wholesale reporting).
Balance sheet analysis 275 Financial assets 275 - Exposure summary and credit mitigation 281 Debt securities 281 - Issuer and IFRS measurement classification 283 - Asset-backed securities 284 Equity shares 285 - Summary and uncollateralised exposure 287 - Settlement basis and central counterparties 288 REIL, provisions and AFS reserves 288 - Loans and related credit metrics 290 - Sector and geographical concentration 293 - REILs and impairments 297 - Gross unrealised losses
The following table analyses financial assets exposures, both gross and net of offset arrangements as well as credit mitigation and enhancement.
Cash and balances at central banks 82.7 — 82.7 — — — — — — 82.7
Gross IFRS Carrying Balance sheet Exposure exposure offset (1) value offset (2) post offset £bn £bn £bn £bn £bn
Securities Clearing Corporation. (2) This reflects the amounts by which RBS’s credit risk is reduced through master netting and cash management pooling arrangements. Derivative master netting agreements include cash pledged with counterparties in respect of net derivative liability positions and are included in lending. (3) Includes cash collateral required against derivative assets of £34.3 billion.
as both CIB and RCR implemented strategic balance sheet reductions through wind-down and disposals.
Derivatives financial Balance Exposure repos Lending Debt Equity assets sheet value Offset (1) post offset £m £m £m £m £m £m £m £m £m
Finance leases and instalment credit — 13,587 14 5 13 — 13,619 (17) 13,602
Notes: (1) This shows the amount by which credit risk exposure is reduced through arrangements, such as master netting agreements and cash management pooling, which give RBS a legal right to set off the financial asset against a financial liability due to the same counterparty. In addition, RBS holds collateral in respect of individual loans and advances to banks and customers. This collateral includes mortgages over property (both personal and commercial); charges over business assets such as plant, inventories and trade debtors; and guarantees of lending from parties other than the borrower. RBS obtains collateral in the form of securities in reverse repurchase agreements. Cash and securities are received as collateral in respect of derivative transactions.
For geographic concentrations refer to: • Lending: Loans and related credit metrics
RBS's continued focus on reducing exposure concentrations, running down assets in RCR and winding down certain portfolios in
• There has been a significant increase in CFG lending across a broad range of industry sectors reflecting in line with business strategy and risk appetite
The asset quality analysis presented below is based on internal asset quality ratings which have ranges for the probability of default, as set out below. Customers are assigned credit grades, based on various credit grading models that reflect the key drivers of default for the customer type. All credit grades across RBS map to both an asset quality scale, used for external financial reporting, and a master grading scale for wholesale exposures used for internal management reporting across portfolios. Debt securities are analysed by external ratings and are therefore excluded from the following table and are set out on pages 281
The table below details for illustrative purposes only, the relationship between internal asset quality (AQ) bands and external ratings published by S&P, for illustrative purposes only. This relationship is established by observing S&P’s default study statistics, notably the one year default rates for each S&P rating grade. A degree of judgement is required to relate the probability of default (PD) ranges associated with the master grading scale to these default rates given that, for example, the S&P
Cash and Derivative Derivative balances and balances at Reverse cash Bank Reverse cash Customer other financial Contingent central banks repos collateral loans Total repos collateral loans Total assets Derivatives Commitments liabilities Total Total
Note: (1) Excludes items in the course of collection from other banks of £995 million (2013 - £1,454 million; 2012 - £1,531 million).
• The improving economic climate and credit conditions and disposals strategy in RCR resulted in the proportion of investment-grade
• Changes to the residential mortgage model and large corporate PD
Ulster Bank reflecting increased work with customers in arrears and improving economic conditions. Past due loans comprise £1.6 billion
Designated as at fair value (DFV) — — 111 2 4 — 117 —
Designated as at fair value — — 104 — 17 1 122 15
Designated as at fair value — — 123 86 610 54 873 516
There was an increase in German, French and Austrian government bonds, partially offset by reductions in Italian, Spanish and
• Gross unrealised losses on AFS debt securities have declined significantly from £1.8 billion in 2012 and £0.9 billion in 2013 to £282 million at the end of 2014. £257 million of the £282 million was due to asset-backed securities, of which only £128 million related to those that had been in a loss position for more than a year primarily reflecting risk reduction in RCR compared with £0.6 billion and £1.8 billion in 2013 and 2012.
Banks institutions (2) Corporate Total Banks institutions (2) Corporate AFS/DFV Total reserves £m £m £m £m £m £m £m £m £m £m
The table below analyses derivatives by type of contract. The master netting agreements and collateral shown below do not result in a net presentation on the balance sheet under IFRS.
GBP USD Euro Other Total Assets Liabilities Notional (1) Assets Liabilities Notional (1) Assets Liabilities £bn £bn £bn £bn £bn £m £m £bn £m £m £bn £m £m
Notes: (1) Includes exchange traded contracts of £2,436 billion (2013 - £2,298 billion; 2012 - £2,497 billion) principally interest rate. Trades are margined daily hence carrying values were insignificant: assets - £8 million (2013 - £69 million; 2012 - £41 million) and liabilities - £119 million (2013 - £299 million; 2012 - £255 million). (2) Interest rate notional includes £18,452 billion (2013 - £22,563 billion; 2012 - £15,864 billion) in respect of contracts with central clearing counterparties to the extent related assets and liabilities are offset.
Agency business within CIB. Tightening of credit spreads in Europe and long dated spreads in the US also contributed to decrease in fair values.
• Uncollateralised derivatives predominantly comprise: ° Corporates: predominantly large corporates with whom RBS
has netting arrangements but collateral is not posted on a daily basis; certain transactions with specific terms that may not fall within netting and collateral arrangements; derivative positions in certain jurisdictions for example China which are either uncollateralised or the collateral agreements are not deemed to be legally enforceable.
° Government: sovereigns and supranational entities with one way collateral agreements in their favour.
The table below analyses the derivative notional and fair value by trading and settlement method.
RBS trades credit derivatives to meet client needs and to mitigate its own credit risk. Credit derivative exposures relating to proprietary trading are minimal. The table below analyses bought and sold protection.
Bought Sold Bought Sold Bought Sold Bought Sold Bought Sold Bought Sold £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn
Risk elements in lending (REIL) comprises impaired loans and accruing loans past due 90 days or more as to principal or interest. Impaired loans are all loans (including loans subject to forbearance) for which an impairment provision has been established; for collectively assessed loans, impairment loss provisions are not allocated to individual loans and the entire portfolio is included in impaired loans. Accruing loans past due 90 days or more comprise loans past due 90 days where no impairment loss is expected.
The tables below analyse gross loans and advances (excluding reverse repos) and the related credit metrics by reportable segment.
REIL as a % Provisions Provisions as a % Impairment of gross loans as a % of gross loans charge/ Amounts
Direct Line Group 2,036 881 — — — nm — — —
• Loans to banks decreased by £2.8 billion in the year to £24.8 billion.
being partially offset by derivative collateral increase, both in CIB, as well as Ulster Bank’s increased cash deposits with Central Bank of Ireland ahead of new regulatory liquidity requirements.
• There has been a significant increase in CFG lending across a broad range of industry sectors, including residential mortgages, auto loans and commercial loans, in line with business strategy and risk appetite. Exchange rate movements also contributed to the increase.
• REIL decreased by £11.2 billion to £28.2 billion, a 28% reduction in the year from £39.4 billion, across all segments except CFG. REIL
as a proportion of gross loans improved to 6.8% from 9.4% in 2013 reflecting sales and repayments of £10.2 billion (£6.9 billion in RCR), write-offs of £5.3 billion (£3.6 billion in RCR), transfers to performing book of £1.5 billion, partially off set by new impaired loans of £7.1 billion (£3.0 billion in RCR). The execution of RCR strategy, resulted in a number of disposals of REIL in the year, primarily in the fourth quarter.
• Loan impairment provision coverage of REIL remained stable at 64% and now stands at £18.0 billion, a £7.2 billion reduction in the year. Provision coverage of gross loans has declined steadily during 2014 and is now 4.4% compared with 6.0% at the end of 2013, the latter reflecting the creation of RCR. The reduction in provision reflected write-off of £5.3 billion (£3.6 billion in RCR) and impairment
• Commercial real estate (CRE) gross lending reduced by £9.3 billion to £43.3 billion, related REIL is almost half of total RBS REIL and has a provision coverage of 68%. Of the total CRE REIL of £13.3 billion, £11.1 billion is in RCR.
January 2014 but also due to improved market conditions and higher collateral values also contributed.
• Commercial Banking REIL as a proportion of loans decreased to 2.9% from 5.0% in 2013, and REIL decreased by 41% (£1.8 billion)
RCR. REIL reductions in the year were mainly due to lower individual cases, albeit some increases were seen in the fourth quarter and reductions in collectively assessed due to improved credit conditions.
The tables below analyse gross loans and advances to banks and customers (excluding reverse repos) and related credit metrics by sector and geography based on the location of lending office. Credit metrics
Gross as a % of as a % as a % of charge/ Amounts loans REIL Provisions gross loans of REIL gross loans (release) written-off of which: Commercial real estate 52,578 20,129 13,209 38.3 66 25.1 5,212 1,749
For the note to this table refer to the following page.
Gross as a % of as a % as a % of charge/ Amounts loans REIL Provisions gross loans of REIL gross loans (release) written-off
Central and local government 9,853 — — — — — — —
of which: Commercial real estate 63,040 22,108 10,077 35.1 46 16.0 2,016 1,186
REIL are stated without giving effect to any security held that could reduce the eventual loss should it occur or to any provisions marked.
UK PBB Bank Banking Banking CIB items CFG RCR RCR Non-Core Total £m £m £m £m £m £m £m £m £m £m £m
Transfer to performing book and repayments (1,306) (1,403) (3,104) (90) (594) — (89) (6,586) (4,090) (10,676)
Provisions are assessed on a case by case basis by experienced specialists with input from professional valuers and accountants. RBS operates a transparent provisions governance framework, setting thresholds to trigger enhanced oversight and challenge.
Non-Core and creation of RCR (1) 150 (1,985) (306) — (766) — 246 (2,661) 16,500 (13,839) —
Disposal of subsidiaries — — — — — — — — (6) — (6)
The table below analyses the impairment charge for loans and securities. Citizens RBS
UK PBB Bank Banking Banking CIB items Group RCR RCR Total £m £m £m £m £m £m £m £m £m £m
Loans to banks — — — — — — — — (10) (10)
The table below analyses available-for-sale debt securities and related reserves, gross of tax.
The table below shows the fair value of available-for-sale debt securities that were in an unrealised loss position at the end of the year and the related gross unrealised losses.
Market risk 299 Key developments in 2014 299 Sources of risk 303 Risk governance 303 Traded market risk 316 Non-traded market risk
These reductions resulted from: • The creation of RCR and consequent accelerated wind-down of capital-intensive and potentially volatile exposures; and
• In relation to CIB: ° the continuing run-down of non-strategic products and exposures in the run-off and recovery business set up towards the end of 2013; and
Risk measurement improvements also continued. Notably, credit and funding valuation adjustments were included in the internal measure of
Previously, only associated hedges were included. The change in scope reflects a more comprehensive economic view of the risk.
RBS continued to manage its non-traded market risk exposures within risk limits throughout the year. Although the restructure of customer facing businesses in 2014 did not affect underlying non-traded market risk exposures, the planned divestment of CFG is expected to reduce structural interest rate and foreign exchange risk exposures.
The majority of traded market risk exposure arises in CIB and RCR.
From a market risk perspective, the trading activities are included within the following markets: currencies; emerging markets; rates; asset-backed products; and traded credit.
Other products are not transacted on an exchange. Of these over-thecounter transactions, those with standard terms may be cleared through central counterparties, while those that are more complex are settled directly with the counterparty and may give rise to counterparty credit risk. For more information on the management of counterparty credit risk, refer to the Credit risk section on page 231.
NTIRR comprises four primary risk factors: repricing risk, yield curve risk, basis risk and optionality risk. For more information, refer to page 316.
Non-traded foreign exchange risk exposures arise from two main sources: • Structural foreign exchange risk - arising from the capital deployed in foreign subsidiaries, branches and associates and related currency funding where it differs from sterling; and
Non-traded equity risk is the potential variation in income and reserves arising from changes in the values of non-trading book equity positions.
Pension-related activities also give rise to market risk. Refer to pages 331 and 332 for more information on risk related to pensions.
The table below analyses RBS’s balance sheet by trading and non-trading business. Trading Non-trading Total business (1) business (2) Non-trading business 2014 £bn £bn £bn primary risk factor
Cash and balances at central banks 75.5 — 75.5 Interest rate, foreign exchange
Reverse repurchase agreements and stock borrowing 64.7 61.1 3.6 Interest rate
Cash and balances at central banks 82.7 — 82.7 Interest rate, foreign exchange
Net loans and advances to customers 390.8 19.4 371.4 Interest rate
Reverse repurchase agreements and stock borrowing 76.4 75.7 0.7 Interest rate
Notes: (1) Trading businesses are entities that primarily have exposures that are classified as trading book under regulatory rules. For these exposures, the main methods used by RBS to measure market risk are detailed under Traded market risk measurement on page 304. (2) Non-trading businesses are entities that primarily have exposures that are not classified as trading book. For these exposures, with the exception of pension-related activities, the main measurement methods are sensitivity analysis of net interest income, internal non-traded VaR and fair value calculations. For more information refer to pages 316 to 322.
Rates Delivers interest rate services through research-based insight to corporates, central banks, financial institutions and hedge funds.
Total RCR RCR is responsible for the accelerated rundown of assets that are capital intensive or have volatile outcomes under stress.
The Market Risk function is responsible for identifying, measuring, monitoring and controlling the market risk arising from both trading and non-trading activities.
For general information on risk governance, refer to the Risk governance section on page 176.
Framework. It sets out the rules that RBS’s businesses must follow to ensure that market risks are identified, measured and effectively managed.
For information on valuation controls, independent price verification and model validation, refer to page 315.
A comprehensive structure and controls are in place aimed at ensuring that this appetite is not exceeded.
The quantitative market risk appetite is expressed in terms of limits for the trading and non-trading activities. These limits, which establish a set of comprehensive boundaries within which business activities are conducted and monitored based on business plans, are proposed by the
Once RBS-level limits are approved by the Executive Risk Forum (ERF), the Director of Market Risk may cascade the limits further down the organisation as required. For each trading business, a document known as a dealing authority compiles details of all applicable limits and trading restrictions.
Limit breaches at RBS-level require escalation by the Director of Market
Risk, as appropriate, to the ERF. Limit breaches at the lower levels require escalation by the head of the relevant market risk segment to the
Traded market risk exposures are monitored against limits and analysed daily by market risk reporting and control functions. A daily report that summarises market risk exposures against the limits set by the ERF is sent to the Chief Risk Officer and market risk managers across the franchises.
The market risk functions also prepare daily risk reports that detail exposures against a more granular set of limits and triggers.
Committee and the Board. The update focuses on risk positions relative to risk appetite; it also covers the key risks and trends, together with a discussion of relevant issues and market topics.
(RNIV) framework to ensure that RBS is adequately capitalised for market risk. In addition, stress testing is used to identify any vulnerabilities and potential losses in excess of VaR and SVaR.
For internal risk management purposes, VaR assumes a time horizon of one trading day and a confidence level of 99%. The VaR model is based on a historical simulation, utilising data from the previous 500 days on an equally weighted basis.
The internal traded VaR model captures all trading book positions including those products approved by the regulator. As noted earlier, from
February 2014, credit and funding valuation adjustments were included in the internal measure of VaR. For an explanation of the distinction between internal VaR and regulatory VaR, refer to page 311.
The internal VaR model captures the impact on the income statement of the following risk factors: • Interest rate risk, which arises from the impact of changes in interest rates and volatilities on cash instruments and derivatives. This includes interest rate tenor basis risk and cross-currency basis risk.
• Equity risk, which arises from the impact of changes in equity prices, volatilities and dividend yields.
• Commodity risk, which arises from the impact of changes in commodity prices and volatilities.
• Inflation risk, which is the risk of a decrease in the value of instruments as a result of changes in inflation rates and associated volatilities.
• Historical VaR and RBS’s implementation of this risk measurement methodology have a number of known limitations, as summarised below, and VaR should be interpreted in light of these. RBS’s approach is to supplement VaR with other risk metrics that address these limitations to ensure appropriate coverage of all material market risks.
• The use of a 99% confidence level VaR statistic does not provide information about losses beyond this level, usually referred to as
VaR that is used for modelled market risk capital uses a ten-day time horizon.
• The VaR of trading positions is computed at the close of business.
Positions may change substantially during the course of the trading day and so intra-day price volatility and trading may not be captured by the model.
• The data used in the model are collected from global sources. For some sources, local end-of-day, rather than London end-of-day, data may be used, resulting in a timing mismatch. This timing mismatch is more material for 1-day return periods than for 10-day periods (which are used for capitalisation purposes) as the overlaps are inherently smaller across shorter periods. When deciding whether or not to use local end-of-day timing, the internal model review committee balances the principle of aligning the treatment of positions and their associated hedges against the goal of using
Average Period end Maximum Minimum Average Period end Maximum Minimum Average Period end Maximum Minimum £m £m £m £m £m £m £m £m £m £m £m £m
Note: (1) RBS benefits from diversification as it reduces risk by allocating positions across various financial instrument types, currencies and markets. The extent of the diversification benefit depends on the correlation between the assets and risk factors in the portfolio at a particular time. The diversification factor is the sum of the VaR on individual risk types less the total portfolio VaR.
within CIB in line with the exit strategy, which largely affected the last three quarters of the year.
° Credit spread VaR declined in H2 2014, because the volatile credit spread series rolled out of the 500-day window for VaR.
A dedicated model-testing team in Market Risk works with the risk managers to: • Test the accuracy of the valuation methods used in the VaR model on appropriately chosen test portfolios and trades; • Apply in-house models to perform advanced internal back-testing to complement the regulatory back-testing; • Identify risks not adequately captured in VaR, and ensure that such risks are addressed via the RNIV framework (refer to page 309); • Identify any model weaknesses or scope limitations and their impact; and
The Hypo P&L reflects the firm’s Clean P&L excluding any intra-day activities.
Regulatory back-testing is performed and reported on a daily basis for legal entities and major business portfolios. Franchise-level market risk teams also perform back-testing at the lower levels as part of the internal ongoing VaR model validation.
models, which are approved by the regulators. However, where appropriate, back-testing is also performed for other portfolios that are not subject to regulatory approval.
The graph below presents 1-day 99% regulatory VaR vs. Hypo P&L for RBS plc, RBS's largest legal entity by market risk RWAs and positions.
• The exception at the RBSSI level resulted from losses in the US
• As noted above, statistically RBS would expect to see back-testing exceptions 1% of the time over a one-year period. At RBS plc level, there was one exception during 2014, confirming that the model was satisfactory.
• The exceptions in the Credit business mainly occurred due to CDS
VaR and SVaR but that are insufficiently captured by the model methodology, for example due to a lack of suitable historical data. The
RNIV framework has been developed to quantify these market risks and to ensure that RBS holds adequate capital.
Assessment process, when a risk manager assesses that the associated risk is not adequately captured by the VaR model; or (ii) as a result of a recommendation made by Model Risk or the model validation team when reviewing the VaR model.
RNIV calculations is internally reviewed by Model Risk. Where appropriate, risk managers set sensitivity limits to control specific risk factors giving rise to the RNIV. RNIV calculations form an integral part of
RBS adopts two approaches for the quantification of RNIVs: • A standalone VaR approach. Under this approach, two values are calculated: (i) the VaR RNIV; and (ii) the SVaR RNIV.
• A stress-scenario approach. Under this approach, an assessment of ten-day extreme, but plausible, market moves is used in combination with position sensitivities to give a stress-type loss number - the stressed RNIV value.
For each legal entity covered by the PRA VaR approval (refer to
Regulatory VaR), RNIV amounts are aggregated to obtain the following three measures: (i) Total VaR RNIV; (ii) Total SVaR RNIV; and (iii) Total stressed RNIV. In each of these categories, potential diversification benefits between RNIVs are ignored.
RNIVs are broadly classified as follows: • Proxied sensitivities or risk factors: to cover instruments for which market data is not available.
model is based on a P&L approximation function rather than full repricing of deals.
• Data selection bias: to cover the possibility of suboptimal data sources being selected for risk factors.
Historical stress testing is a measure that is used for internal management. Using a similar technical framework to VaR, the current portfolio is stressed using historical data since 1 January 2005. The methodology simulates the impact of the worst loss that would be incurred by historical risk factor movements over the period, assuming a holding period specific to the risk factors and the businesses. At present, a holding period of 60 business days is applied for credit risk factors including in the case of asset-backed securities (ABS) and for the available-for-sale (AFS) portfolios that are held by CIB Treasury and generally a period of 10 business days for other risk factors. RBS reviews the holding periods annually.
Historical stress tests form part of the market risk limit framework and their results are reported daily to senior management.
Vulnerability-based stress testing begins with the analysis of a portfolio and expresses the key vulnerabilities of the portfolio in terms of plausible, so-called vulnerability scenarios under which the portfolio would suffer material losses. These scenarios can be historical, forward-looking, macroeconomic or hypothetical. Vulnerability-based stress testing is used for internal management information and is not subject to limits. However, relevant scenarios are reported to senior management.
A market risk economic capital framework was developed in 2013 and was introduced in internal reporting in 2014.
In addition to SVaR and stress tests, RBS uses a range of other risk measures to complement VaR. These measures often represent local
Sensitivity measures refer to the changes in deal or portfolio value that result from small changes in market parameters that are subject to the market risk limit framework.
The market risks subject to capital requirements under Pillar 1 are primarily interest rate, credit spread and equity risks in the trading book and foreign exchange and commodity risks in both the trading and nontrading books. Interest rate and equity risks are split between general and specific risks. General risks represent market risks due to a move in a market as a whole, such as a main index or yield curve, while specific risks represent market risks arising from events particular to an underlying issuer.
RBS uses both methods, with the internal model approach being used to calculate about 76% (2013 - 86%) of its capital charge.
VaR and SVaR capture general and specific risks but not risks arising from the impact of defaults and rating changes associated with traded credit products and their derivatives. For these risks, three productdependent approaches are used: • The incremental risk charge (IRC) model captures risks arising from rating migration and default events for the more liquid traded credit instruments and their derivatives.
• Securitisation and re-securitisation risks in the trading book are treated with the non-trading book standardised capitalisation approach.
Bank of Scotland plc, RBS Securities Inc, RBS Financial Products Inc, and National Westminster Bank Plc. As from 1 December 2014, this approval takes the form of an internal model approach permission, replacing the earlier VaR waiver.
RBS’s SVaR model has also been approved by the PRA for use in the capital requirement calculation. The regulatory SVaR differs from internal
SVaR as it covers only regulator-approved products, locations and legal entities.
The RNIV framework does not include tail event risks; these risks are covered indirectly by the regulatory multiplier applied to VaR and directly by relevant charges, notably the IRC discussed below.
The IRC model quantifies the impact of rating migration and default events on the market value of instruments with embedded credit risk (in particular, bonds and credit default swaps) that are held in the trading book. It further captures basis risk between different instruments, maturities and reference entities. Following the internal ratings-based approach for credit risk, the IRC is calculated over a one-year capital horizon with a 99.9% confidence level.
The constant level of risk requirement is met by replacing positions that default or migrate in one period with equivalent positions in the next. The average liquidity horizon by position at the year end was 3.3 months
Until Q2 2014, RBS’s APR model was used to determine the capital that should be held against all material price risks, including those arising from defaults and credit rating changes affecting securities in the hedged portfolio, using a 99.9% confidence level over a one year time horizon.
This model was applied to the correlation trading portfolio subject to certain eligibility criteria (principally that the underlying names be liquid corporate CDS positions).
Given the reduction in the size of the correlation trading portfolio, RBS
ceased using an internal model for all price risk during Q2 2014. With the
PRA’s approval, all remaining open risk is now capitalised under standardised rules.
• Specific interest rate risk of securitisation positions: This charge rose, reflecting the change in treatment regarding securitisation exposures with a risk weight of 1,250%.
• Overall, the Pillar 1 model-based PRR declined 30% during 2014, driven by reductions in the VaR and SVaR charges and the IRC, offset somewhat by an increase in the RNIV charge.
With the PRA’s approval, all remaining open risk is now capitalised under standardised rules.
The following table analyses the IRC by rating and product. Internal ratings (1)
Notes: (1) Based on an assessment of S&P, Moody’s and Fitch ratings, where available, or on RBS’s internal master grading scale. (2) The figures presented are based on the spot IRC charge at 31 December 2014 and will therefore not agree with the IRC position risk requirement, as this is based on the 60-day average. The figures presented above are in capital terms. (3) The IRC figures by product category presented above are based on an internal allocation and do not constitute standalone position risk requirements.
• Spot IRC capital fell £189 million or 43% year on year, for the same reasons noted on the previous page for the IRC PRR. The largest decline was in the interest rate derivatives (much of it due to decreased positions in BBB-rated EU periphery exposure). This was partially offset by the removal of CVA eligible hedges under the
• The increase in the non-investment grade and unrated categories was caused by the change in treatment regarding securitisation exposures with a risk weight of 1,250%. This increase was partially offset by the disposal of assets across the rating categories.
Traders are responsible for marking-to-market their trading book positions daily, ensuring that assets and liabilities in the trading book are measured at their fair value. Any profits or losses on the revaluation of positions are recognised daily.
Pricing models are developed by a dedicated front office quantitative team, in conjunction with the trading desk. They are used for the valuation of positions for which prices are not directly observable and for the risk management of the portfolio.
• The conclusions of the review are used by Market Risk to inform risk limits and by Finance to inform model reserves.
All model changes are approved through model governance at the franchise level. Changes to existing models that have an impact on VaR
Based on the review and findings from Model Risk, an internal model governance committee with appropriate delegated authority considers whether a model can be approved for use and whether any conditions need to be imposed, including those relating to the remediation of material issues raised through the review process. Once approved through internal governance, the new or amended model is implemented.
Model Risk also reassesses the appropriateness of approved risk models on a periodic basis according to the approved Periodic Review Policy.
Each periodic review consists of a quick scan assessment and a subsequent decision by an internal model governance committee with appropriate delegated authority to re-ratify a model based on the quick scan assessment or to perform additional work prior to making a decision whether or not to re-ratify a model. In the quick scan assessment Model
The Chief Risk Officer delegates responsibility for day-to-day control of non-traded interest rate risk and foreign exchange risk to the Director of
The ERF sets RBS’s appetite for non-traded market risk and approves appropriate risk limits as recommended by the Director of Market Risk and the ALCo. Further information on the process and the limit framework can be found on pages 196 to 205.
Non-traded interest rate risk (NTIRR) factors are grouped into the following categories: • Repricing risk, which arises when asset and liability positions either mature (in the case of fixed-rate positions) or their interest rates reset (in the case of floating-rate positions) at different dates. These mismatches may give rise to net interest income and economic value volatility as interest rates vary.
• Basis risk, which arises when related instruments with the same tenor are valued using different reference yield curves. Changes in the spread between the different reference curves can result in unexpected changes in the valuation of or income difference between assets, liabilities or derivative instruments. This occurs, for example, in the retail and commercial portfolios, when products valued on the basis of the Bank of England base rate are funded with LIBOR-linked instruments.
RBS’s policy is to manage the interest rate sensitivity within risk limits that are approved by the ERF and endorsed by the ALCo before being cascaded to lower levels. These include, in particular, interest rate sensitivity and VaR limits.
These exposures are assessed and managed by RBS Treasury to predefined risk appetite levels under delegated authority from the ALCo.
RBS Treasury seeks to limit the potential volatility impact on RBS’s
Foreign exchange exposures arising from customer transactions are sold down by businesses on a regular basis in line with RBS policy.
Investments, acquisitions or disposals of a strategic nature are referred to
ADCo for execution, such transactions are referred for approval to the
Officer or as otherwise required. Decisions to acquire or hold equity positions in the non-trading book that are not of a strategic nature, such as customer restructurings, are taken by authorised persons with delegated authority under the credit approval framework.
RBS’s standard VaR metrics - which assume a time horizon of one trading day and a confidence level of 99% - are based on interest rate repricing gaps at the reporting date. Daily rate moves are modelled using observations over the last 500 business days. These incorporate customer products plus associated funding and hedging transactions as well as non-financial assets and liabilities such as property, plant and equipment, capital and reserves. Behavioural assumptions are applied as appropriate.
The table below shows the NTIRR VaR for RBS’s retail and commercial banking activities at a 99% confidence level together with a currency analysis of period end VaR.
Average Period end Maximum Minimum £m £m £m £m £m £m £m
• The reduction in exposure was achieved in the second half of the year through both hedging and the utilisation of naturally arising balance sheet offsets, such as the increase in net free reserves following the partial IPO of CFG. This resulted in period end VaR
• These movements remained well within RBS’s approved market risk appetite.
RBS targets a weighted average life for these economic hedges. This is accomplished using a continuous rolling maturity programme, which is primarily managed by Treasury to achieve the desired profile. The maturity profile of the hedge aims to reduce the potential sensitivity of income to rate movements. The structural hedging programme is RBSwide, capturing the position in the UK banking businesses and regulated subsidiaries in other jurisdictions.
• The incremental impact of product hedges on net interest income remained positive in 2014, increasing from £585 million to £648 million. Throughout the year, short term wholesale cash rates remained at or close to historical low levels. The notional size of the hedge increased from £48 billion to £64 billion. The scope of the hedging programme was extended to cover not only customer current accounts but also customer savings deposits. The incremental yield on the portfolio above 3-month LIBOR fell from 1.2% to 1.0%, largely as a result of the one-off effect of establishing the new hedge. At the end of December 2014, the equivalent incremental yield available in the market was 0.8% compared with 1.5% at the end of 2013.
• Across RBS, banking book exposure to medium-term fixed rates fell during 2014. The increased exposure established by the product hedge was offset by reducing exposure in Treasury.
Net assets of Non- Net assets of Net Structural foreign Residual structural overseas controlling overseas operations investment currency exposures Economic foreign currency operations interests excluding NCI (1) hedges pre-economic hedges hedges (2) exposures 2014 £m £m £m £m £m £m £m
RFS MI in other non-sterling) (2) Economic hedges mainly represent US dollar and euro preference shares in issue that are treated as equity under IFRS and do not qualify as hedges for accounting purposes.
• Structural foreign currency exposure at 31 December 2014 was £12.0 billion and £5.9 billion before and after economic hedges, respectively, £9.6 billion and £9.7 billion lower than at 31 December 2013, of which £7.5 billion related to CFG. Movements in structural foreign currency exposure result from changes in the net assets of overseas operations, non-controlling interests and net investment hedges.
• Economic hedges, which mainly consist of equity capital securities in issue, remained broadly unchanged.
• Changes in foreign currency exchange rates affect equity in proportion to structural foreign currency exposure. For example, a 5% strengthening in foreign currencies against sterling would result in a gain of £0.6 billion in equity (2013 - £1.1 billion), while a 5%
Refer to the table below for the balance sheet carrying value of non-traded book equity positions.
The exposures may take the form of (i) equity shares listed on a recognised exchange, (ii) private equity shares or (iii) other equity shares consisting mainly of Federal Reserve and Federal Home Loan Bank stock. Refer to the table below for the net realised and unrealised gains from these positions.
Available-for-sale portfolios in CIB and RCR, other than the structured credit portfolio, do not typically form part of the structural interest rate framework due to the short-term nature of the interest rate risks they carry. They are thus monitored and managed through the same framework and using the same metrics as portfolios in the trading book.
• The average VaR for the non-trading book, predominantly comprising available-for-sale portfolios, was £4.6 million during 2014 compared with £9.2 million during the same period in 2013. This was largely driven by a decline in the credit spread VaR in Q1, which partly reflected a decision to switch some of the securities held as collateral from floating-rate notes issued by financial institutions to government bonds during March as part of RWA
• A further driver of the decline, which largely affected the last three quarters of the year, was the decision to reduce the US ABP
RBS holds capital for two types of non-traded market risk exposures: NTIRR and non-trading book foreign exchange.
Pillar 1 capital must be held for non-trading book foreign exchange exposures, as outlined under CRR Articles 455 and 92(3)c. Structural foreign exchange exposures are excluded from the calculations as outlined under CRR Article 352(2); such exposures are considered under
Country events may include a sovereign default, a political conflict, a banking crisis or a deep and prolonged recession leading to possible counterparty defaults. Transfer or convertibility restrictions imposed by a country’s government to stem the loss of foreign currency reserves may temporarily prevent counterparties from meeting their foreign currency payment obligations. Major currency depreciation may also affect a customer’s income or debt burden, leading to default.
Unfavourable operating conditions may include the risk that a weak or creditor-unfriendly legal system within a country makes it difficult for RBS
to recover its claims in the event of customer default. An unreliable or unstable political system may lead to sudden compliance or reputational issues, or even expropriation without proper compensation.
The conflict between Ukraine and Russia and the consequent escalating tensions between Russia and the West triggered an internal review of credit grades. Limits for both countries were adjusted, additional credit restrictions were placed on new business and exposures were reviewed against international sanctions.
The eurozone region emerged from recession, with some of the periphery countries recovering but growth in other countries, including Germany mostly sluggish. The EU’s Single Supervisory Mechanism (SSM)
This SSM is the first pillar of the EU Banking Union that should reduce the risk of a repeat of the financial crisis over the longer term and that helps to support the quality of the bank’s exposure, particularly in Europe.
Spanish covered bonds, contributing to a reduction in Spanish net balance sheet exposure to £3.3 billion (2013 - £9.1 billion; 2012 - £11.5 billion).
The Chinese economy continues its structural slowdown; broad reforms aim at ensuring more sustainable long-term growth, but accumulated financial vulnerabilities bear downside risks. Growth in emerging markets is expected to be restrained by reduced capital inflows, depressed global commodity prices, and geopolitical conflicts, at times resulting in market volatility in the most vulnerable economies.
The Executive Risk Forum (ERF) delegates authority to set sovereign ratings, sovereign loss given default rates, and country Watchlist colours to the Group Chief Credit Officer (CCO), who may further delegate this authority to Strategic Risk. The ERF delegates authority to decide on country risk matters such as risk appetite, risk management strategy and framework, and risk exposure and policy to the Credit Risk Committee
(CoRM). This includes the setting of country limits, where appropriate including allocations for specific product groups. The CCO and CRC can escalate issues to the ERF when necessary.
The top-down component is guided by global risk appetite; each country’s internal sovereign rating; its strategic importance to the bank; the composition of the bank’s portfolio; the funding profile; and an assessment of the potential for losses arising from possible key country risk events. This component provides a clear structure for the consideration of downside scenarios, the identification of countries that pose material concentration risks to the bank, and possible management actions.
Bottom-up analysis includes the risk/return relationship as well as reputational and regulatory risk.
Country limits are set for almost all countries. The UK is an exception, given its home country status. The US is another exception because of the specific local risk management structure, the size of the local portfolio and corresponding role in RBS-wide risk management, together with the country's strong ratings.
The CoRM team monitors and reports on exposures to all countries, and follows up with the customer businesses in the event of limit excesses.
CoRM has delegated authority up to specified levels to decide on country limit increases; any such decision must be reported to the CRC.
Countries Watchlisted Amber are monitored closely. Appetite for countries Watchlisted Red is limited to short-term business in areas such as trade finance and derivatives, unless the country is deemed a strategic priority country.
The tables on pages 326 to 327 show RBS’s exposure at 31 December 2014, 2013 and 2012. Exposures are reported by country of operation of the obligor, except exposures to governments and individuals, which are shown by country of residence.
Countries shown are those which had ratings of A+ or below from
Standard and Poor’s, Moody’s or Fitch at 31 December 2014, where
RBS’s balance sheet exposure (as defined in this section) to counterparties operating (or individuals residing) in them exceeded £1 billion. Also included are selected eurozone countries.
The exposures are stated before taking into account risk mitigants such as guarantees, insurance or collateral (with the exception of reverse repos) which may have been put in place to reduce or eliminate exposure to country risk events. The tables show CDS positions separately, as
Exposures relating to ocean-going vessels are not included as they cannot be meaningfully assigned to specific countries from a country risk perspective.
2014 £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m
2012 £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m
(3) Derivatives (net) - Comprise the mark-to-market (mtm) value of such contracts after the effect of legally enforceable netting agreements in line with the corresponding regulatory capital models, but before the effect of collateral.
(4) Securities financing transactions (SFT) (net) - Comprise the mtm value of the cash and securities that are due to RBS at a future date under repurchase agreements, reverse repurchase agreements, stock borrowing, stock lending and equity financing transactions, after the effect of collateral intrinsic to the transaction and legally enforceable netting agreements. Counterparty netting is applied as per the corresponding regulatory capital approach. Additional collateral called to offset mtm positions (variation margin) is not included.
(5) Net balance sheet exposure - Comprises net lending, debt securities, derivatives (net) and SFT (net) exposures, as defined above. (6) Off-balance sheet - Comprises letters of credit, guarantees, other contingent obligations and legally committed undrawn facilities. (7) Total exposure - Comprises net balance sheet exposure and off-balance sheet exposure, as defined above. (8) Credit default swaps (CDSs) - Under a CDS contract, the credit risk on the reference entity is transferred from the buyer to the seller. ‘Fair value’ (or ‘mtm value’) represents the balance sheet carrying value of the resulting exposure. The mtm value of CDSs is included in derivatives against the counterparty of the trade, as opposed to the reference entity. The notional is the par value of the credit protection bought or sold and is included against the reference entity of the CDS contract. The column ‘CDS notional less fair value’ represents the net effect on exposure should the CDS contracts be triggered by a credit event, assuming a zero recovery rate on the reference exposure. This net effect would be the increase in exposure arising from sold positions netted against the decrease arising from bought positions. For a sold position, the change in exposure equals the notional less the fair value amount; this represents the amount RBS would owe to its CDS counterparties if the reference entity defaulted. Positive recovery rates would tend to reduce the gross components (increases and decreases) of those numbers. Exposures relating to credit derivative product companies (CDPCs) and related hedges as well as Nth-to-default basket swaps have been excluded, as they cannot be meaningfully attributed to a particular reference entity or country. Exposures to CDPCs are disclosed on page 287.
• The comments below relate to changes in country exposures in 2014 unless indicated otherwise.
Notional bought and sold CDS decreased significantly, primarily as a result of novations. On balance, net bought CDS protection on eurozone exposures increased by £1.3 billion. This largely related to hedging of the credit valuation adjustment on uncollateralised or under-collateralised positions, the fair value of which increased driven by much lower interest rates and a stronger US dollar. Net lending exposure in RCR fell to £4.1 billion for the eurozone as a whole, including £2.0 billion in Ireland, £0.8 billion in Spain and £0.6 billion in Germany, with the commercial real estate sector (CRE)
° Ireland - net balance sheet exposure fell by £3.7 billion or 14%
° Spain - exposure decreased by £5.8 billion to £3.3 billion, largely due to sales of €4.8 billion (mostly covered bonds) from the RBS N.V. liquidity portfolio, under favourable market conditions. These sales also reduced concentrations in
Spanish banks and CRE. Net HFT debt exposure and lending to the construction, telecommunications and other sectors also fell.
° Portugal - exposure was stable at £0.8 billion. HFT debt securities increased as trading returned but remained small.
° Funding mismatches - material estimated funding mismatches at risk of redenomination at 31 December 2014 were: - Ireland £4.0 billion (down from £6.5 billion due to reduced lending).
and telecommunications sectors decreased. RBS had £6.8 billion government bond holdings at 31 December 2014 (AFS - £1.1 billion; HFT long positions - £5.7 billion). Off-balance exposure fell by £1.2 billion to £8.6 billion, particularly in the corporate and government sectors.
RBS N.V. liquidity portfolio and in cash deposits held with the central bank, as RBS N.V.'s liquidity needs decreased in line with balance sheet reductions. Net HFT exposure rose by £1.7 billion through normal market fluctuations while derivatives exposure increased by £1.1 billion to £6.8 billion, largely driven by business with a few major banks.
• Belgium - net balance sheet exposure increased by £0.8 billion to £3.6 billion, mostly in HFT government bonds and derivatives exposure to banks.
• Japan - HFT government bond exposure increased by £3.2 billion to £3.0 billion, driven by market fluctuations. This rise was partly offset by reductions in central bank deposits, in corporate and bank lending, and in derivatives and SFT exposure to financial institutions. In 2015, RBS will be closing its onshore trading business and withdrawing from Japanese government primary bonds dealership activity.
• China - lending to banks and off-balance sheet exposure decreased by £1.9 billion and £1.2 billion respectively to £0.7 billion and £0.5 billion, mostly in trade finance, driven by more stringent capital requirements and an effort by RBS to improve average returns in a highly competitive environment. Given concerns about economic risks, RBS undertook stress testing across both financial institutions and corporate portfolios and started setting early warning indicators and action plans.
• Shipping - exposures relating to ocean-going vessels are not included in the country risk disclosures as they cannot be meaningfully assigned to specific countries. RBS’s shipping portfolio of £10.4 billion (refer to the Credit risk section on page 247 for more details) is predominantly US dollar-denominated and under English law, and is not expected to be affected by specific country events.
RBS has exposure to pension risk through its defined benefit schemes worldwide. The five largest schemes, which represent around 96% of the bank’s pension liabilities, are the Royal Bank of Scotland Group Pension
Ireland), the Ulster Bank Pension Scheme, the Royal Bank of Scotland
Pension Trust. The Main scheme is the principal source of pension risk.
Throughout 2014, various pension risk stress-testing initiatives were undertaken, focused both on internally defined scenarios and on scenarios to meet integrated Prudential Regulation Authority (PRA) and
European Banking Authority (EBA) stress testing requirements. For more information on stress testing, refer to page 199.
Board, the Executive Committee and the Board Risk Committee on the material pension schemes that RBS has an obligation to support. If agreement is not reached between RBS and the trustee, the Pensions
Regulator can take action by appointing independent trustees, or by serving a contribution notice on the employer requiring payment to the scheme.
Risk is also mitigated in other ways. In October 2006, the Main scheme was closed to new employees. In November 2009, RBS confirmed that it was making changes to the Main scheme and a number of other defined benefit schemes, including the introduction of a limit of 2% per annum (or the annual change in the Consumer Price Index, if lower) to the amount of any salary increase that will count for pensionable purposes.
Pension risk reporting is submitted monthly to the Board in the RBS Risk
RBS also undertakes a number of stress tests and scenario analyses on its material defined benefit pension schemes each year as part of its risk measurement framework. These stress tests are also used to satisfy the requests of regulatory bodies such as the EBA and the PRA. The stress testing framework includes the production of the pension risk internal capital adequacy assessment process as well as additional stress tests for a number of internal management purposes.
Change Change Change in net in value in value of pension of assets liabilities obligations £m £m £m
Fall in real swap yields of 0.25% at all durations with no change in credit spreads or nominal swap yields 595 895 (300)
At 31 December 2012 Fall in nominal swap yields of 0.25% at all durations with no change in credit spreads or real swap yields 76 255 (179)
Fall in real swap yields of 0.25% at all durations with no change in credit spreads or nominal swap yields 578 995 (417)
Business risk is the risk that RBS suffers losses as a result of adverse variances in its revenues, costs or both as a result of its business plan and strategy. Such variances may be caused by a variety of specific factors such as volatility in pricing, sales volumes, and input costs as well as more general factors such as exposure to macroeconomic, regulatory and industry risks.
Business risk exists at all levels of the organisation and is generated at the transaction level. It is affected by other risks RBS faces, which could contribute to any adverse changes in revenues or costs. Refer to page 171 for a full list of risks.
In the planning cycles, expected and potential scenarios for revenues and costs are determined, on a bottom-up basis, through plans reflecting expectations of the external environment and the bank’s strategic priorities. These scenarios are tested against a range of sensitivities and stresses to identify the key risk drivers behind any potential volatility, together with management actions to address and manage them.
RBS operates a forecasting process to identify projected changes in, or risks to, key financial metrics, and ensures appropriate actions are taken.
RBS responded to business risk challenges by designing cost management programmes to deliver substantial savings in 2014 and beyond. RBS Risk Management was also involved in these discussions.
The stress test outcomes form a core part of the assessment of earnings and capital adequacy risk appetite and are approved by the Board. The measurement of change in profit and loss of the franchises under stress thereby acts as a measure of business risk. Franchises also conduct their own bottom-up stress testing exercises to assess the financial performance of their businesses under stress.
Strategic risk is the risk that RBS will make inappropriate strategic choices, or that there will be changes in the external environment to which RBS fails to adapt its strategies.
Failure to manage this risk could have a wide-ranging impact. It could lower revenues, profitability and returns to shareholders, and severely impair RBS’s ability to meet other financial and non-financial objectives.
There were improvements in the monitoring processes with a focus on the “Top Risks” that could prevent RBS achieving its strategic objectives.
The Board has ultimate responsibility for approving strategic plans, initiatives and changes to strategic direction. In addition to the annual cycle, each customer business presents a more detailed individual “deep dive” review of key dimensions of its strategy at a Board meeting at different points during the year.
Top and emerging risks processes monitor the most material risks to strategic objectives. Strategic progress is monitored through quarterly performance review meetings between customer business CEOs and the
Individual customer businesses bear much of the responsibility for managing strategic risks. The senior leadership of the customer businesses track progress on the initiatives and action plans to deliver the strategy through a range of key performance indicators such as financial performance, risk metrics, market shares and numbers of customers, and satisfaction scores.
A full sensitivity analysis of the consolidated strategic plan is undertaken, at the end of the strategic and financial planning process, to assess the robustness of the plan, and compliance with strategic risk objectives, under a variety of stressed conditions. In certain cases, following consideration of an opportunity, RBS may decide not to pursue the opportunity as a result of a perceived strategic risk.
RBS also undertakes strategic reviews to decide how to react to specific developments. It is now considering, for instance, how best to react to the
Independent Commission on Banking’s proposals for ring-fencing of retail banking operations.
A wide variety of financial, risk, customer and market metrics are used to monitor business performance and thus, inter alia, the effectiveness of chosen strategies. Any deviations from the expected values are analysed to determine drivers which could be strategic, environmental or management. Example metrics include: customer attrition; deposit balances; revenues; impairments or loan losses; profitability; and riskweighted returns.
336 Independent auditor’s report 342 Consolidated income statement 343 Consolidated statement of comprehensive income 344 Consolidated balance sheet 345 Consolidated statement of changes in equity 348 Consolidated cash flow statement 349 Accounting policies 361 Notes on the consolidated accounts 361 1 Net interest income 362 2 Non-interest income 374 7 Profit attributable to preference shareholders and paid-in equity holders 374 9 Earnings per ordinary and equivalent B share 393 12 Financial instruments - maturity analysis 405 18 Property, plant and equipment 406 19 Prepayments, accrued income and other assets 407 20 Discontinued operations and assets and liabilities of disposal groups 410 22 Accruals, deferred income and other liabilities 417 25 Non-controlling interests 440 33 Net cash flow from operating activities 440 34 Analysis of the net investment in business interests and intangible assets 441 35 Interest received and paid 441 36 Analysis of changes in financing during the year 441 37 Analysis of cash and cash equivalents 448 39 Directors’ and key management remuneration 448 40 Transactions with directors and key management 449 42 Post balance sheet events 450 Parent company financial statements and notes
In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the company’s affairs as at 31 December 2014 and of the
As explained in the accounting policies, in addition to complying with its legal obligation to apply IFRSs as adopted by the European Union, the Group has applied IFRSs as issued by the International Accounting Standards Board (IASB).
In our opinion the Group financial statements comply with IFRSs as issued by the IASB.
We confirm that: • we have concluded that the directors’ use of the going concern basis of accounting in preparing the financial statements is appropriate; and
However, because not all future events and conditions can be predicted, this statement is not a guarantee as to the Group’s ability to continue as a going concern.
As set out in the Accounting policies, the Group uses one of three methods to assess the amount of impairment provisions required: • For larger, individually significant loans and advances, impairments are assessed on an individual basis. These are largely in the
assets, loan impairments in RCR are particularly sensitive to changes in market conditions. During the year, £1,320 million was released from RCR
impairment provisions following improvements in economic and market conditions, and realisation of collateral at greater than anticipated amounts together with increases in collateral values.
• Governance controls, including attending key meetings that form part of the approval process for loan impairment provisions.
Our audit has focused on testing the valuation adjustments including those for credit risk, funding related and own credit. A particular area of focus of our audit has been in testing the valuation of the more illiquid financial instruments disclosed as level 3 instruments which comprised assets of £5 billion and liabilities of £5 billion.
For instruments with significant, unobservable valuation inputs, we used our own internal valuation experts to assess and challenge the valuation assumptions used, including considering alternative valuation methodologies used by other market participants.
• Recognition, measurement and disclosure of litigation and regulatory actions in respect of foreign-exchange trading, mortgage-backed securities litigation in US and other litigation.
We tested the design and operating effectiveness of the Group’s key controls over the identification, recording and disclosure of exposures.
The controls tested included those over the timely identification of exposures; the completeness and accuracy of data used in any models; and the assessment of the provision and disclosure of exposures in accordance with the relevant accounting standards.
We challenged the adequacy of provisions recognised by critically assessing the key assumptions used in the provision models, comparing the assumptions to available peer and historical data. This work also included, amongst other things, reviewing regulatory correspondence and the Group’s complaint logs.
We also assessed the disclosures provided on conduct and litigation exposures in order to determine whether the disclosures were sufficiently clear about the uncertainties that existed in relation to the contingent liabilities and provisions recognised, including the sensitivity of the provisions to changes in the underlying assumptions.
Included on the Group’s balance sheet at 31 December 2014 are deferred tax assets of £1,540 million, goodwill of £6,264 million and other intangible assets of £1,517 million that are supported by the Group’s forecasts of future profitability.
For each cash generating unit we critically assessed the forecasts of the cash flows and the appropriateness of the key assumptions used; including forecast taxable profits, growth rates and discount rates, in order to challenge the calculation of the recoverable amount of deferred taxation, goodwill and other intangible assets.
We tested the Group’s forecasts of profits, comparing the forecasts to historical experience and assessing whether the forecast is reflective of the Group’s committed plans.
application systems and databases that support financial reporting, the existence of these deficiencies means there is an increased risk that the data and reports from the affected systems and databases are not reliable.
We tested the design and operating effectiveness of the Group’s controls over the information systems that are critical to financial reporting and identified weaknesses in the access controls.
• Assessed the design and operating effectiveness of any controls that mitigated the identified risks.
Our audit procedures relating to these matters were designed in the context of our audit of the financial statements as a whole, and not to express an opinion on individual accounts or disclosures. Our opinion on the financial statements is not modified with respect to any of the risks described above, and we do not express an opinion on these individual matters.
A number of these components consist of a number of different operations with audit work performed in different countries. Full scope audits were performed of the Group’s operations in ten countries, and a further 19 countries were subject to an audit of specified account balances or specified audit procedures where the extent of our testing was based on our assessment of the risks of material misstatement and of the materiality of the
Group’s operations at those locations. The audit work performed across the 29 countries accounted for 99% (2013 - 98%) of the Group’s total assets and 94% (2013 - 85%) of its total revenue.
The Group audit team sent component auditors detailed instructions on audit procedures to be undertaken and the information to be reported back to the Group audit team. Regular contact was maintained throughout the course of the audit with key component auditors including holding Group planning meetings, regular communications on the status of the audits and a programme of planned visits was followed that was designed so that the
Senior Statutory Auditor or another senior member of the Group audit team visited each significant component audit team a number of times during the year.
We have nothing to report arising from these matters or our review.
Under the UK Listing Rules we are also required to review the part of the Corporate Governance Statement relating to the company’s compliance with the ten provisions of the UK Corporate Governance Code.
In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during the audit and the directors’ statement that they consider the annual report is fair, balanced and understandable and whether the annual report appropriately discloses those matters that we communicated to the
We confirm that we have not identified any such inconsistencies or misleading statements.
(Loss)/profit from discontinued operations, net of tax 20 (3,445) 558 318
Basic and diluted loss from continuing and discontinued operations 9 (30.6p) (80.3p) (55.0p)
Note: (1) Ten B shares rank pari-passu with one ordinary share (see Note 27).
The accompanying notes on pages 361 to 449 the accounting policies on pages 349 to 359 and the audited sections of the Business review: Capital and risk management on pages 168 to 334 form an integral part of these financial statements.
Foreign currency gains on hedges of net assets 108 105 177
Adjustments for: Write down of goodwill and other intangible assets 533 1,403 518
The accounts are prepared on a going concern basis (see the Report of the directors, page 99) and in accordance with International Financial
Committee of the IASB as adopted by the European Union (EU) (together
IFRS). The EU has not adopted the complete text of IAS 39 ‘Financial
With the exception of investment property and certain financial instruments as described in Accounting policies 9, 14, 16 and 18, the accounts are presented on an historical cost basis.
The Group adopted a number of new and revised IFRSs effective 1
IFRIC 21 ‘Levies’ provides guidance on accounting for levies payable to public authorities if certain conditions are met on a particular date.
(Amendments to IAS 36)’ aligns IAS 36’s disclosure requirement about recoverable amount with IASB’s original intentions.
(Amendments to IAS 39)’ provides relief from discontinuing hedge accounting on novation of a derivative designated as a hedging instrument.
when it is exposed, or has rights, to variable returns from its involvement with that entity and has the ability to affect those returns through its power over the other entity; power generally arises from holding a majority of voting rights. On acquisition of a subsidiary, its identifiable assets, liabilities and contingent liabilities are included in the consolidated accounts at their fair value. A subsidiary is included in the consolidated financial statements from the date it is controlled by the Group until the date the Group ceases to control it through a sale or a significant change in circumstances. Changes in the Group’s interest in a subsidiary that do not result in the Group ceasing to control that subsidiary are accounted for as equity transactions.
Interest income on financial assets that are classified as loans and receivables, available-for-sale or held-to-maturity and interest expense on financial liabilities other than those measured at fair value are determined using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset or financial liability (or group of financial assets or liabilities) and of allocating the interest income or interest expense over the expected life of the asset or liability. The effective interest rate is the rate that exactly discounts estimated future cash flows to the instrument's initial carrying amount.
Calculation of the effective interest rate takes into account fees payable or receivable that are an integral part of the instrument's yield, premiums or discounts on acquisition or issue, early redemption fees and transaction costs. All contractual terms of a financial instrument are considered when estimating future cash flows.
Payment services - this comprises income received for payment services including cheques cashed, direct debits, Clearing House Automated
Brokerage fees - in respect of securities, foreign exchange, futures or options transactions entered into on behalf of a customer are recognised as income on execution of a significant act.
Group will recover its carrying amount principally through a sale transaction rather than through continuing use. A non-current asset (or disposal group) classified as held for sale is measured at the lower of its carrying amount and fair value less costs to sell. If the asset (or disposal group) is acquired as part of a business combination it is initially measured at fair value less costs to sell. Assets and liabilities of disposal groups classified as held for sale and non-current assets classified as held for sale are shown separately on the face of the balance sheet.
The results of discontinued operations - comprising the post-tax profit or loss of discontinued operations and the post-tax gain or loss recognised either on measurement to fair value less costs to sell or on disposal of the discontinued operation - are shown as a single amount on the face of the income statement; an analysis of this amount is presented in Note 20 on the accounts. A discontinued operation is a cash generating unit or a group of cash generating units that either has been disposed of, or is classified as held for sale, and (a) represents a separate major line of business or geographical area of operations, (b) is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations or (c) is a subsidiary acquired exclusively with a view to resale.
Short-term employee benefits, such as salaries, paid absences, and other benefits are accounted for on an accruals basis over the period in which the employees provide the related services. Employees may receive variable compensation satisfied by cash, by debt instruments issued by the Group or by RBSG shares. The treatment of share-based compensation is set out in Accounting policy 25. Variable compensation that is settled in cash or debt instruments is charged to profit or loss over the period from the start of the year to which the variable compensation relates to the expected settlement date taking account of forfeiture and clawback criteria.
(when benefits are withdrawn or changed so that the present value of the defined benefit obligation decreases). A settlement is a transaction that eliminates all further obligation for part or all of the benefits.
Intangible assets acquired by the Group are stated at cost less accumulated amortisation and impairment losses. Amortisation is charged to profit or loss over the assets' estimated economic lives using methods that best reflect the pattern of economic benefits and is included in Depreciation and amortisation. These estimated useful economic lives are: Computer software 3 to 12 years
Costs incurred prior to the establishment of technical feasibility and economic viability are expensed as incurred as are all training costs and general overheads. The costs of licences to use computer software that are expected to generate economic benefits beyond one year are also capitalised.
Intangible assets include goodwill arising on the acquisition of subsidiaries and joint ventures. Goodwill on the acquisition of a subsidiary is the excess of the fair value of the consideration transferred, the fair value of any existing interest in the subsidiary and the amount of any non-controlling interest measured either at fair value or at its share of the subsidiary’s net assets over the Group's interest in the net fair value of the subsidiary’s identifiable assets, liabilities and contingent liabilities.
(including assets owned and let on operating leases) over their estimated useful lives. The depreciable amount is the cost of an asset less its residual value. Freehold land is not depreciated.
The estimated useful lives of the Group’s property, plant and equipment are: Freehold buildings 50 years
Long leasehold property (leases with more than 50 years to run) 50 years
cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. For the purposes of impairment testing, goodwill acquired in a business combination is allocated to each of the Group’s cash-generating units or groups of cash-generating units expected to benefit from the combination. The recoverable amount of an asset or cash-generating unit is the higher of its fair value less cost to sell and its value in use. Value in use is the present value of future cash flows from the asset or cash-generating unit discounted at a rate that reflects market interest rates adjusted for risks specific to the asset or cashgenerating unit that have not been taken into account in estimating future cash flows. If the recoverable amount of an intangible or tangible asset is less than its carrying value, an impairment loss is recognised immediately in profit or loss and the carrying value of the asset reduced by the amount of the loss. A reversal of an impairment loss on intangible assets
(excluding goodwill) or property, plant and equipment is recognised as it arises provided the increased carrying value is not greater than it would have been had no impairment loss been recognised. Impairment losses on goodwill are not reversed.
Any gain or loss arising from a change in fair value is recognised in profit or loss. Rental income from investment property is recognised on a straight-line basis over the term of the lease in Other operating income.
The Group's consolidated financial statements are presented in sterling which is the functional currency of the company.
Non-monetary items denominated in foreign currencies that are stated at fair value are translated into the relevant functional currency at the foreign exchange rates ruling at the dates the values are determined.
Loans and advances to customers, at the amount of the net investment in the lease being the minimum lease payments and any unguaranteed residual value discounted at the interest rate implicit in the lease. Finance lease income is allocated to accounting periods so as to give a constant periodic rate of return before tax on the net investment and included in
Operating lease rental expense is included in Premises and equipment costs and recognised as an expense on a straight-line basis over the lease term unless another systematic basis better represents the benefit to the Group.
Provision is made for restructuring costs, including the costs of redundancy, when the Group has a constructive obligation to restructure.
Deferred tax is the tax expected to be payable or recoverable in respect of temporary differences between the carrying amount of an asset or liability for accounting purposes and its carrying amount for tax purposes.
Held-to-maturity investments - a financial asset may be classified as a held-to-maturity investment only if it has fixed or determinable payments, a fixed maturity and the Group has the positive intention and ability to hold to maturity. Held-to-maturity investments are initially recognised at fair value plus directly related transaction costs. They are subsequently measured at amortised cost using the effective interest method (see
Subsequently they are measured at fair value. Gains and losses on heldfor -trading financial assets are recognised in profit or loss as they arise.
(a) eliminates or significantly reduces a measurement or recognition inconsistency; or (b) applies to a group of financial assets, financial liabilities or both, that the Group manages and evaluates on a fair value basis; or (c) relates to an instrument that contains an embedded derivative which is not evidently closely related to the host contract.
Financial assets that the Group designates on initial recognition as being at fair value through profit or loss are recognised at fair value, with transaction costs being recognised in profit or loss, and are subsequently measured at fair value. Gains and losses are recognised in profit or loss as they arise.
Available-for-sale financial assets - financial assets that are not classified as held-to-maturity; held-for-trading; designated as at fair value through profit or loss; or loans and receivables are classified as available-for-sale.
Financial assets can be designated as available-for-sale on initial recognition. Available-for-sale financial assets are initially recognised at fair value plus directly related transaction costs. They are subsequently measured at fair value. Unquoted equity investments whose fair value cannot be measured reliably are carried at cost and classified as available-for-sale financial assets. Impairment losses and exchange differences resulting from retranslating the amortised cost of foreign currency monetary available-for-sale financial assets are recognised in profit or loss together with interest calculated using the effective interest method (see Accounting policy 3) as are gains and losses attributable to the hedged risk on available-for-sale financial assets that are hedged items in fair value hedges (see Accounting policy 23). Other changes in the fair value of available-for-sale financial assets and any related tax are reported in other comprehensive income until disposal, when the cumulative gain or loss is reclassified from equity to profit or loss.
Additionally, held-for-trading financial assets that do not meet the definition of loans and receivables may, in rare circumstances, be transferred to available-for-sale financial assets or to held-to-maturity investments. Reclassifications are made at fair value. This fair value becomes the asset's new cost or amortised cost as appropriate. Gains and losses recognised up to the date of reclassification are not reversed.
Where the Group’s interest in equity shares following the exchange is such that the Group controls an entity, that entity is consolidated.
Impaired loans and receivables are written off, i.e. the impairment provision is applied in writing down the loan's carrying value partially or in full, when the Group concludes that there is no longer any realistic prospect of recovery of part or all of the loan. For loans that are individually assessed for impairment, the timing of write off is determined on a case-by-case basis. Such loans are reviewed regularly and write off will be prompted by bankruptcy, insolvency, renegotiation and similar events.
Except for US retail portfolios, where write off of the irrecoverable amount takes place within 60 - 180 days, the typical time frames from initial impairment to write off for the Group’s collectively-assessed portfolios are: • Retail mortgages: write off usually occurs within five years, or when an account is closed if earlier.
• Overdrafts and other unsecured loans: write off occurs within six years.
• Business and commercial loans: write offs of commercial loans are determined in the light of individual circumstances; the period does not exceed five years. Business loans are generally written off within five years.
Financial assets carried at fair value - when a decline in the fair value of a financial asset classified as available-for-sale has been recognised directly in other comprehensive income and there is objective evidence that it is impaired, the cumulative loss is reclassified from equity to profit or loss. The loss is measured as the difference between the amortised cost (including any hedge accounting adjustments) of the financial asset and its current fair value. Impairment losses on available-for-sale equity instruments are not reversed through profit or loss, but those on available-for-sale debt instruments are reversed, if there is an increase in fair value that is objectively related to a subsequent event.
Financial liabilities that the Group designates on initial recognition as being at fair value through profit or loss are recognised at fair value, with transaction costs being recognised in profit or loss, and are subsequently measured at fair value. Gains and losses are recognised in profit or loss as they arise.
Fair value - financial instruments; further details are given in Note 11.
Group either (a) transfers the contractual rights to receive the asset's cash flows; or (b) retains the right to the asset's cash flows but assumes a contractual obligation to pay those cash flows to a third party. After a transfer, the Group assesses the extent to which it has retained the risks and rewards of ownership of the transferred asset. The asset remains on the balance sheet if substantially all the risks and rewards have been retained. It is derecognised if substantially all the risks and rewards have been transferred. If substantially all the risks and rewards have been neither retained nor transferred, the Group assesses whether or not it has retained control of the asset. If the Group has retained control of the asset, it continues to recognise the asset to the extent of its continuing involvement; if the Group has not retained control of the asset, it is derecognised.
Securities subject to a sale and repurchase agreement under which substantially all the risks and rewards of ownership are retained by the
Incremental costs and related tax that are directly attributable to an equity transaction are deducted from equity.
Derivative financial instruments are initially recognised, and subsequently measured, at fair value. The Group’s approach to determining the fair value of financial instruments is set out in the section of Critical accounting policies and key sources of estimation uncertainty entitled
A derivative embedded in a contract is accounted for as a standalone derivative if its economic characteristics are not closely related to the economic characteristics of the host contract; unless the entire contract is measured at fair value with changes in fair value recognised in profit or loss.
Cash flow hedge - in a cash flow hedge, the effective portion of the gain or loss on the hedging instrument is recognised in other comprehensive income and the ineffective portion in profit or loss. When the forecast transaction results in the recognition of a financial asset or financial liability, the cumulative gain or loss is reclassified from equity to profit or loss in the same periods in which the hedged forecast cash flows affect profit or loss. Otherwise the cumulative gain or loss is removed from equity and recognised in profit or loss at the same time as the hedged transaction. Hedge accounting is discontinued if the hedge no longer meets the criteria for hedge accounting; if the hedging instrument expires or is sold, terminated or exercised; if the forecast transaction is no longer expected to occur; or if hedge designation is revoked. On the discontinuance of hedge accounting (except where a forecast transaction is no longer expected to occur), the cumulative unrealised gain or loss is reclassified from equity to profit or loss when the hedged cash flows occur or, if the forecast transaction results in the recognition of a financial asset or financial liability, when the hedged forecast cash flows affect profit or loss. Where a forecast transaction is no longer expected to occur, the cumulative unrealised gain or loss is reclassified from equity to profit or loss immediately.
Investments in associates and interests in joint ventures are recognised using the equity method. They are stated initially at cost, including attributable goodwill, and subsequently adjusted for post-acquisition changes in the Group’s share of net assets.
Vesting conditions include service conditions (requiring the employee to complete a specified period of service) and performance conditions
In the cash flow statement, cash and cash equivalents comprises cash and deposits with banks with an original maturity of less than three months together with short-term highly liquid investments that are readily convertible to known amounts of cash and subject to insignificant risk of change in value.
The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its financial statements. UK company law and IFRS require the directors, in preparing the Group's financial statements, to select suitable accounting policies, apply them consistently and make judgements and estimates that are reasonable and prudent. In the absence of an applicable standard or interpretation, IAS 8 ‘Accounting Policies, Changes in Accounting
Estimates and Errors’, requires management to develop and apply an accounting policy that results in relevant and reliable information in the light of the requirements and guidance in IFRS dealing with similar and related issues and the IASB's ’Conceptual Framework for Financial
The Group operates a number of defined benefit pension schemes as described in Note 4 on the accounts. As described in Accounting policy 5, the assets of the schemes are measured at their fair value at the balance sheet date. Scheme liabilities are measured using the projected unit credit method, which takes account of projected earnings increases, using actuarial assumptions that give the best estimate of the future cash flows that will arise under the scheme liabilities. These cash flows are discounted at the interest rate applicable to high-quality corporate bonds of the same currency and term as the liabilities. Any recognisable surplus or deficit of scheme assets over liabilities is recorded in the balance sheet as an asset (surplus) or liability (deficit).
The Group capitalises goodwill arising on the acquisition of businesses, as discussed in Accounting policy 6. The carrying value of goodwill as at
Impairment testing in accordance with Accounting policy 8 above inherently involves a number of judgmental areas: the preparation of cash flow forecasts for periods that are beyond the normal requirements of management reporting; the assessment of the discount rate appropriate to the business; estimation of the fair value of cash-generating units; and the valuation of their separable assets. The sensitivity of the assessment to changes in assumptions is discussed in Note 17 on page 404.
Interest Rate Hedging Products - following an industry-wide review conducted in 2012 in conjunction with the Financial Services Authority
(now being dealt with by the Financial Conduct Authority (FCA)), the
detailed description of the Group’s material legal proceedings and a discussion of the nature of the associated uncertainties are given in Note
taxable profits against which the losses and other temporary differences can be utilised. The Group has considered the carrying value of the deferred tax asset as at 31 December 2014 and concluded that it is recoverable based on future projections. Deferred tax assets of £5,738 million (2013 - £4,942 million; 2012 - £3,827 million) have not been recognised in respect of tax losses and other temporary differences where the availability of future taxable profits is uncertain. Further details about the Group’s deferred tax assets are given in Note 23.
Individual component - all impaired loans that exceed specific thresholds are individually assessed for impairment. Individually assessed loans principally comprise the Group's portfolio of commercial loans to medium and large businesses. Impairment losses are recognised as the difference between the carrying value of the loan and the discounted value of management's best estimate of future cash repayments and proceeds from any security held. These estimates take into account the customer's debt capacity and financial flexibility; the level and quality of its earnings; the amount and sources of cash flows; the industry in which the counterparty operates; and the realisable value of any security held.
November 2013. This amendment distinguishes the accounting for employee contributions that are related to service from that for those that are independent of service.
Implementation of these changes is not expected to have a material effect on the Group’s financial statements.
In July 2014 the IASB published IFRS 9 ‘Financial Instruments’. IFRS 9 replaces the current financial instruments standard IAS 39, setting out new accounting requirements in a number of areas. First, there are revisions to the classification and measurement of financial instruments.
IFRS 9 makes major and fundamental changes to accounting for financial instruments. The Group is continuing its assessment of its effect on the
IFRS 15 ‘Revenue from Contracts with Customers’ was issued in May 2014. It will replace IAS 11 ‘Construction Contracts’, IAS 18 ‘Revenue’
May 2014 amends IFRS 11 ‘Joint Arrangements’ to clarify that the donor of assets and liabilities to a joint operation should hold its continuing interest in them at the lower of cost and recoverable amount. The effective date is 1 January 2016.
September 2014 making a number of minor amendments to IFRS. Its effective date is 1 January 2016.
‘Disclosure of Interests in Other Entities’ and IAS 28 ‘Investments in
Changes in fair value of own debt and derivative liabilities attributable to own credit - debt securities in issue 44 131 (1,473)
Other changes in the fair value of financial assets and liabilities designated as at fair value through profit or loss and related derivatives 83 (26) 153
Profit on sale of property, plant and equipment 137 35 32
Write down of goodwill and other intangible assets (see Note 17) 523 1,403 124
Products redress and related costs, and other litigation and conduct costs. Further details are provided in Note 22.
• The UK bank levy, which was charged at a rate of 0.156% on chargeable liabilities in excess of £20 billion, and amounted to £250 million).
The average number of persons employed, rounded to the nearest hundred, in continuing operations during the year, excluding temporary staff, was 92,800 (2013 - 97,900; 2012 - 103,600); on the same basis there were 18,200 people employed in discontinued operations (2013 - 22,900; 2012 34, 800). The average number of temporary employees during 2014 was 8,100 (2013 - 9,800; 2012 - 10,100). The number of persons employed in continuing operations at 31 December, excluding temporary staff, by reportable segment (see Note 38 for more details), were as follows: 2014 2013* 2012*
There were 17,400 people employed in discontinued operations at 31 December 2014 (2013 - 19,000; 2012 - 33,700).
As described in the Remuneration report on page 91, the Group grants share-based awards to employees principally on the following bases: Award plan Eligible employees Nature of award (1) Vesting conditions (2) Settlement
Long-term incentives (3) Senior employees Awards of conditional shares or share options
Notes: (1) Awards are equity-settled unless international comparability is better served by cash-settled awards. (2) All awards have vesting conditions and therefore some may not vest. (3) Long-term incentives include the Executive Share Option Plan, the Long-Term Incentive Plan and the Medium-Term Performance Plan.
The strike price of options and the fair value on granting awards of fully paid shares is the average market price over the five trading days preceding grant date.
Options are exercisable within six months of vesting; 1.9 million options were exercisable at 31 December 2014 (2013 - 1.3 million; 2012 - 0.2 million).
The weighted average share price at the date of exercise of options was £3.65 (2013 - £3.36; 2012 - £2.78). At 31 December 2014, exercise prices ranged from £2.33 to £39.27 (2013 and 2012 - £2.33 to £39.27) and the average contractual life was 3.7 years (2013 - 3.5 years; 2012 - 3.9 years). The fair value of options granted in 2014 was £18 million (2013 - £25 million; 2012 - £28 million).
The awards granted in 2014 vest evenly over the following three anniversaries.
Inc. (CFG), incentive awards of over 11 million RBSG shares and a convertible bond were replaced with awards of over 3 million CFG shares having the same market value.
The market value of awards exercised in 2014 was £44 million (2013 - £37 million; 2012 - £10 million). There are vested options over 7 million shares exercisable up to 2019 (2013 - 13 million; 2012 - 18 million).
At 31 December 2014, a provision of £1 million had been made in respect of 0.1 million options over shares that may be cash-settled (2013 - £1 million in respect of 0.1 million share awards; 2012 - £1 million in respect of 0.1 million share awards and 0.3 million options over shares).
The following tables analyse Group and CIB variable compensation awards for 2014(1). Group CIB
Proportion of variable compensation that is deferred 84% 88% 96% 97%
Less: forfeiture of amounts deferred from prior years (64) (37) (56)
Income statement charge for amounts deferred from prior years 137 242 286
Less: clawback of variable compensation deferred from prior years (59) (10) (3) — —