There are three broad categories of capital across these two tiers: • CET1 capital. CET1 capital must be perpetual and capable of unrestricted and immediate use to cover risks or losses as soon as these occur. This includes ordinary shares issued and retained earnings. CET1 capital absorbs losses before other types of capital and any loss absorbing instruments.
Assesses capital held against the size of on and off-balance sheet exposures (largely based on accounting value with some adjustments)
In addition to capital, other specific loss absorbing instruments, including senior notes issued by RBSG, may be used to cover certain gone concern capital requirements which, in the EU, is referred to as minimum requirement for own funds and eligible liabilities (MREL).
For regulatory purposes, RWAs are grouped into four categories: Risk Description
Credit Risk of loss from a borrower failing to repay amounts due by the due date
Counterparty credit Risk of loss from a counterparty not meeting its contractual obligations
Also included is the risk of loss from changes in the fair value of derivative instruments
Operational Risk of loss from inadequate or failed internal processes, people and systems or from external events
Pillar 2A Captures risks that apply to individual banks that are either not adequately captured or not captured at all under Pillar 1
PRA buffer Captures forward looking risks and potential losses under a severe stress scenario *unaudited
• Capital held by banks that are deemed to be systemically important
In addition to the minimum Pillar 1 requirements that apply to all banks, the Group may be required to hold additional capital if specified by its regulators. This is captured under the Pillar 2 framework and consists of two components: • Pillar 2A: covers risks to the Group that are not captured or not fully captured under Pillar 1. For example, pension risk is not captured in Pillar 1 therefore capital that may need to be held against this risk is assessed under Pillar 2A.
The assessment of Pillar 2 requirements is an output from the
Group’s internal capital adequacy assessment process that is described in more detail on page 179. Pillar 2 also utilises the output of the Group’s stress testing exercises which is described in more detail on pages 178 and 179.
Throughout 2015 and 2016, UK, EU and international standard and rule-making bodies have issued proposals and final standards on revising the level and measurement of capital adequacy ratios including the measurement of RWAs. This may affect the level of RWAs and the capital that the Group is required to hold in the future years. Further details of prudential regulatory changes that may impact the Group’s capital adequacy ratio are set out on page 177.
The Group has to hold a minimum amount and quality of capital to satisfy the leverage ratio regulatory requirements. Unlike capital adequacy ratios, leverage ratio requirements do not consider the riskiness of the Group’s positions.
The leverage ratio requirements that the Group must meet may be subject to change from developing regulation. Further details are set out on page 177.
The Group is subject to minimum requirements in relation to the amount of capital it must hold in relation to its RWAs. The table below summarises the minimum ratios of capital to RWAs that the Group is expected to have to meet once all currently adopted regulation is fully implemented by 1 January 2019. These ratios apply at the consolidated group level. Different minimum capital requirements may apply to individual legal entities or sub-groups.
(2) Globally systemically important banks (G-SIBs), as designated by the Financial Stability Board (FSB), are subject to an additional capital buffer of between 1% and 3.5%. Based on the most recent determination of the FSB, the Group is subject to an additional capital requirement of 1.0%
(4) Additional capital requirements under Pillar 2A may be specified by the PRA as a ratio or as an absolute value. The table sets out an implied ratio to cover the full value of Pillar 2A requirements.
The PRA requires that the level of this buffer is not publicly disclosed. (6) The capital conservation buffer, the countercyclical capital buffer, the G-SIB buffer and systemic risk buffer (where applicable) make up the combined buffer. If the Group fails to meet the combined buffer requirement, it is subject to restrictions on distributions on CET1 instruments, discretionary coupons on AT1 instruments and on payment of variable remuneration or discretionary pension benefits. These restrictions are calculated by reference to the Group’s Maximum Distributable Amount (MDA). The MDA trigger is below the PRA buffer and MDA restrictions are not automatically triggered if the Group fails to meet its PRA buffer. The MDA is calculated as the amount of interim or year-end profits not yet incorporated into CET1 capital multiplied by a factor ranging from 0 to 0.6 depending on the size of the CET1 shortfall against the combined buffer.
Notes: (1) The countercyclical leverage ratio buffer is set at 35% of the Group’s CCyB. As noted above this buffer may be set between 0% and 2.5% and the FPC has currently set the UK
CCyB at 0%. The applicable ratio for foreign exposures may be different. (2) As set out in the FPC’s SRB framework, published in May 2016, the FPC intends to direct the PRA to apply an additional leverage ratio buffer to UK G-SIBs set at 35% of the G-
• The Group will assess capital requirements based on a forecast of the Group’s future business performance under adverse economic and market conditions over the forecast period. A range of scenarios of different severity may be examined *unaudited
The examination of capital requirements under the base economic and market conditions allows the Group to demonstrate how the projected business performance allows it to meet all internal and regulatory capital requirements as they arise over the plan horizon. For example, the Group will assess its ability issue to loss absorbing debt instruments in sufficient quantity to meet regulatory timelines. The cost of issuance will be factored into business performance metrics.
Group but also by the Group’s regulators to set bank-specific capital buffers through the PRA buffer.
The Group participates in a number of regulatory stress tests implemented by regulatory authorities to test industry-wide vulnerabilities under crystallising global and domestic systemic risks. In 2016, the Group participated in two regulatory stress tests. Details of these stress tests are set out on the following page.
banks to tail risk events. The severity of the test is related to policymakers’ assessments of risk levels across markets and regions.
• The 2016 stress test examined the impact over five years of a synchronised global downturn across the UK and global economies. The stress test also assessed a stressed level of misconduct costs.
• On a fully loaded basis, the Group’s CET1 ratio under the adverse scenario was projected to be 8.1% as at 31 December 2018. The low point
• Post the impact of management actions and the conversion of £2 billion AT1 capital in place for 2015, the Group’s low point CET1 ratio increased from 5.5% to 6.7%, meeting the
in 2017, which increased to 2.9% after the management actions, below the 3% leverage hurdle rate.
Group has taken actions to strengthen its capital position. As a result, the Group now has a revised capital plan that brings it back over the thresholds.
narrowed the range of uncertainty around its capital and leverage position by addressing a number of legacy issues including recording additional provisions of £5.9 billion for conduct and litigation costs. RBS also continued to de-risk its balance sheet.
The Group will be required to hold sufficient capital and other loss absorbing instruments such that, in the event of failure, there can be an orderly resolution that minimises any adverse impact on financial stability whilst preventing public funds being exposed to loss.
In order that there is sufficient loss absorbing capacity prepositioned across the Group, the proceeds of externally issued
MREL will be downstreamed to material operating subsidiaries in the form of capital or other subordinated claims. This ensures that internal MREL will absorb losses before operating liabilities within operating subsidiaries.
Although the BoE continue to develop its approach to the calibration of MREL within banking groups, the BoE policy statement sets out the framework that it will use to determine the distribution of MREL within banking groups. Under this framework, the BoE will set individual MRELs for all institutions within the Group and may also set individual MRELs for entities within the Group that are important from a resolution perspective.
The Group is not planning to downstream the proceeds of external MREL issuance prior to the completion of legal entity and business realignment required to implement ring-fencing.
The Group faces a number of changes in prudential regulation that may adversely impact the amount of capital it must hold and consequently may increase funding costs and reduce return on equity. The nature and timing of implementation of a number of these changes is not currently final.
In 2017, the UK, EU and BCBS are expected to further develop prudential regulation including the approach to calculating credit risk and operational risk RWAs, additional details on the MREL framework and a review of the leverage ratio framework.
Regulatory changes are actively monitored by the Group including engagement with industry associations and regulators and participation in quantitative impact studies.
Monitoring the changing regulatory landscape forms a fundamental part of capital planning and management of its business.
The Group believes that its strategy to focus on simpler, lower risk activities within a more resilient recovery and resolution framework will enable it to manage the impact of these changes.
Actual or potential key changes that might impact the Group’s capital requirements
• A new systemic risk buffer will apply to the RBS ring-fenced bank sub-group from 1 January 2019.
• Statement of Policy published by the PRA in December 2016.
• For model-based RWAs, potential change to capital floors based on the standardised approach.
• The standardised approach relates to the CRR 2(1) proposal to amend regulation published by the European Commission.
• Changes to CVA relate to a consultation published by the
Leverage ratio • Changes to the design and calibration of the framework with a focus on derivative exposures and margining.
• Recalibration of the UK leverage ratio framework to offset exclusion of central bank reserves from the calculation.
Capital management is critical in supporting the Group’s business and is enacted through an end to end framework across the
Capital risk appetite is set by the Board, reflecting the Group’s strategic objectives, current and future prudential regulatory requirements and market expectations.
It is expressed as a set of target ratios for CET1 and leverage under both normal and stressed financial conditions. Capital risk appetite is set at various levels including for the Group and its businesses. Performance against risk appetite is regularly monitored.
Regular returns are submitted to the PRA which include a two year rolling forward view.
• Shorter term forecasts are developed frequently in response to actual performance, changes in internal and external business environment and to manage risks and opportunities.
• Capital plans are developed to maintain capital of sufficient quantity and quality to support the Group’s business and strategic plans over the planning horizon within approved risk appetite and minimum regulatory requirements.
• Capital resources and capital requirements are assessed across a defined planning horizon.
• Capital planning informs potential capital actions including managing capital through buy backs or through new issuance.
• Decisions on capital actions will be influenced by strategic and regulatory requirements, the cost and prevailing market conditions.
• As part of capital planning, the Group will monitor its portfolio of capital issuance and assess the optimal blend and most cost effective means of financing.
Stress testing is a key risk management tool used by the Group and is a fundamental component of the Group’s approach to capital management.
• Sensitivity testing: examining the impact of an incremental change to one or more risk factors.
• Impact assessment captures input from across the Group including from businesses.
• Scenario results used to inform the bank’s business and capital plans.
• Scenario results analysed by subject matter experts and appropriate management actions are developed.
• Scenario results and management actions are reviewed and agreed by senior management through executive committees including ERF,
4) Risk mitigation: through identifying actions that can be taken to mitigate risks or could be taken in the event of adverse changes to the business or economic environment. Risk mitigation is substantially supplemented through the Group’s recovery plan.
The ICAAP consists of a point in time capital assessment of the
Group’s exposures and risks at the financial year end and a forward looking stress capital assessment.
The ICAAP is used by the Group to form a view of capital adequacy separately to the regulatory minimum requirements.
The Group has mechanisms to allocate capital across its legal entities and businesses that aim to optimise the utilisation of capital resources taking into account applicable regulatory requirements, strategic and business objectives and risk appetite.
The framework for allocating capital is approved by the Asset and
Capital management is subject to substantial review and governance across the Group including capital management policies that are approved by the Asset and Liability Committee or Board Risk Committee
The Board approves the Group’s capital plans, including its key legal entities and businesses, and including the results of the stress tests relating to those capital plans.
The recovery plan sets out a range of triggers that activate the implementation of the recovery plan and sets out the operational plan for its implementation.
Resolution is implemented if the Group fails and the appropriate regulator places the Group into resolution. Resolution is owned and implemented by the appropriate regulatory authority and the
Group has a multi-year programme in place to develop resolution capability and meet regulatory requirements.
The Group is working with global regulators to ensure that the
As part of the response to the 2008 financial crisis the UK
Capital and leverage: Key ratios Capital, RWAs and risk asset ratios, on the basis of end-point Capital Requirements Regulation (CRR) and transitional rules, calculated in accordance with PRA definitions, are set out below. 2016 2015
General: From 1 January 2015, RBS has been required to meet at least 56% of its Pillar 2A capital requirement with CET1 capital and the balance with Additional Tier 1 and/or Tier 2 capital. The Pillar 2A capital requirement is the additional capital that RBS must hold, in addition to meeting its Pillar 1 requirements in order to comply with the PRA’s overall financial adequacy rule.
(3) Where the deductions from AT1 capital exceed AT1 capital, the excess is deducted from CET1 capital. (4) Insignificant investments in equities of other financial entities (net): long cash equity positions are considered to have matched maturity with synthetic short positions if the long position is held for hedging purposes and sufficient liquidity exists in the relevant market. All the trades are managed and monitored together within the equities business. (5) Based on our current interpretations of the Commission Delegated Regulation issued in December 2013 on credit risk adjustments, RBS’s standardised latent provision has been reclassified to specific provision and is not included in Tier 2 capital.
RWAs: (1) Current securitisation positions are shown as risk-weighted at 1,250%. (2) RWA uplifts include the impact of credit valuation adjustments and asset valuation correlation on large financial sector entities (3) RWAs reflect implementation of the full internal model method suite, and include methodology changes that took effect immediately on CRR implementation. (4) Counterparties which meet the eligibility criteria under CRR are exempt from the credit valuation adjustments volatility charges (5) The CRR final text includes a reduction in the risk-weight relating to small and medium-sized enterprises.
Note: (1) CRR as implemented by the Prudential Regulation Authority in the UK, with effect from 1 January 2014. All regulatory adjustments and deductions to CET1 have been applied in full for the end-point CRR basis with the exception of unrealised gains on available-for-sale securities which has been included from 2015 for the PRA transitional basis. (2) The Group’s Tier 1 grandfathering cap is set at £5.8 billion for 2016 (2015 - £6.7 billion).
Share capital and reserve movements in respect of employee share schemes 208 — — 208
The leverage exposure is based on the CRR Delegated Act. End-point CRR basis
Loss absorbing capital RBS’s capital components and estimated loss absorbing capital (LAC) at 31 December 2016 based on current regulatory interpretations are set out below. For details regarding regulatory developments in relation to MREL requirements, refer to page 176. The roll-off profile and average spread relating to senior debt and Tier 2 instruments is set out on the next page.
The following table illustrates the components of estimated LAC in RBSG and operating subsidiaries.
(1) value value (2) value (3) value £bn £bn £bn £bn £bn £bn £bn £bn
Tier 1 capital: end-point CRR compliant AT1 of which: RBSG operating subsidiaries (opcos) — — — — — — — —
Senior unsecured debt securities issued by: LAC as a ratio of RWAs (4) 24.9% 24.9%
Notes: (1) Par value reflects the nominal value of securities issued. (2) Regulatory capital instruments issued from operating companies are included in the transitional LAC calculation, to the extent they meet the MREL criteria. (3) LAC value reflects RBS’s interpretation of the Bank of England’s policy statement on the minimum requirements for own funds and eligible liabilities (MREL), published in
Capital risk* continued Roll-off profile Based on current guidance, RBS anticipates issuing senior bonds from its holding company to ensure LAC classification under MREL
- weighted average rate spread (bps) 92 10 43 125 — 5 136
The table below analyses the movement in credit risk RWAs on the end-point CRR basis during the year, by key drivers. Credit risk RWAs
• RWAs decreased by £14.4 billion to £228.2 billion primarily as result of run down of Capital Resolution and the reduction in operational risk (£5.9 billion) partly offset by adverse exchange rate movements (£11.5 billion) as sterling weakened against all major currencies.
Capital Resolution (£4.2 billion), Ulster Bank RoI (£2.6 billion) Commercial Banking (£2.1 billion) and NatWest
• The annual operational risk recalculation resulted in a decrease of £2.0 billion and a further £3.9 billion reduction relating to the removal of the Citizens related element following PRA approval.
• Growth in UK lending, both new and organic, and the transfer of Northern Ireland loans from UK PBB were the key contributors to the increase in Commercial Banking.
• Capital Resolution RWAs continued to decrease in line with risk reduction strategy (£14.5 billion) with the majority of the movement seen in Markets (£4.9 billion), primarily derivative mitigation activities and terminations, and disposals and runoff in Global Transactions Services (£3.1 billion), shipping
• The Central items decrease of £7.1 billion is significantly driven by the operational risk reduction relating to Citizens.
All the quantitative disclosures in this section are audited except for those in Liquidity metrics and Behavioural maturity.
increase from the prior year, driven by Capital Resolution running down more deposits than loans.
RBS may access various funding facilities offered by central banks from time to time. The use of such facilities can be both part of a wider strategic objective to support initiatives to help stimulate economic growth or as part of the broader liquidity management and funding strategy. Usage and repayment of available central bank facilities will fit within the overall liquidity risk appetite and concentration limits.
Risk appetite Meeting regulatory and set internal risk limits for liquidity and funding.
RBS’s core assets. RBS monitors its liquidity positions against these risk tolerances on a daily basis. In setting risk limits the Board considers the nature of RBS’s activities, overall risk appetite, market best practice and regulatory compliance.
• Has in place strategies, policies and practices to ensure that
RBS maintains sufficient liquidity: the risk management framework determines the sources of liquidity risks and the steps that can be taken when these risks exceed certain monitored limits. These steps include when and how to use the liquid asset portfolio, and other balance sheet actions that can be undertaken. The Asset and Liability
Regulatory oversight and liquidity framework* RBS operates across multiple jurisdictions and is subject to a number of regulatory regimes, with the key metrics being: Ratio Exposure type Description
Coverage of 30 day net cash outflows in stress - effective from
The principal regulator, the PRA, has a comprehensive set of liquidity regulations which implement the Capital Requirements
Directive (CRD) IV liquidity regime in the UK. To comply with the
An ongoing exercise to comply with best practice and regulatory standards for liquidity management.
LCR is being introduced on a phased basis and UK banks are initially required to maintain a minimum 90% LCR by 1 January
The Basel Committee on Banking Supervision (BCBS) published its final recommendations for implementation of the NSFR in
(EC) is due to submit a legislative proposal to the European
European Union (EU). In the meantime, RBS uses the definitions from the BCBS guidelines, and its own internal interpretations, to calculate the NSFR.
(refer to page 179), which covers all legal entities within the
Group. The plan sets out credible recovery options that could be implemented in the event of a severe stress to restore the business to a stable and sustainable position, focussing on addressing the bank’s capital and liquidity position.
RBS Recovery Plan to ensure they operate consistently in the event of a stress scenario.
Stress testing* Under the liquidity risk management framework RBS maintains the ILAAP, a component of which is an assessment of net stressed liquidity outflows. RBS considers a range of extreme but plausible stress scenarios on cash flows, liquidity resources, profitability, solvency, asset encumbrance and survival horizon.
The market perceives RBS to be suffering from a severe stress event which results in an immediate assumption of increased credit risk or concerns over solvency.
A market stress event affecting all participants in a market through contagion, counterparty failure and other market risks. RBS is impacted under this scenario but no more severely than any other participants with equivalent exposure.
Combined scenario This scenario models the combined impact of an idiosyncratic and market stress occurring at once. The combined scenario reflects the contingency that a severe name-specific event occurs at
Ulster Bank Ireland DAC, hold locally managed portfolios that comply with local regulations that may differ from PRA rules.
The UK DoLSub liquidity portfolio accounted for 96% of the total liquidity portfolio; this portion is available to meet liquidity needs as they arise across RBS. The remaining liquidity reserves are held within non-UK bank subsidiaries for local use.
RBS categorises its liquidity portfolio, including its locally managed liquidity portfolios, into primary and secondary liquid assets: • Primary liquid assets such as cash and balances at central banks, treasury bills and other high quality government and
• Secondary liquid assets are eligible as collateral for local central bank liquidity facilities, but do not meet the core local regulatory definition. These assets include own-issued securitisations or whole loans that are retained on balance sheet and pre-positioned with a central bank so that they may be converted into additional sources of liquidity at very short notice.
Liquidity risk Key metrics* The table below sets out the key liquidity and related metrics monitored by RBS. Ratios are set out in order of tenor. 2016 2015
Notes: (1) On 1 October 2015 the LCR became the PRA’s primary regulatory liquidity standard. It is a Pillar 1 metric to which the PRA apply Pillar 2 add-ons. UK banks are required to meet a minimum standard of 90% from 1 January 2017, rising to 100% by 1 January 2018. The published LCR excludes Pillar 2 add-ons. RBS calculates the LCR using its own interpretations of the EU LCR Delegated Act, which may change over time and may not be fully comparable with those of other financial institutions.
The table below shows the liquidity portfolio by product, liquidity value and by carrying value. Liquidity value is lower than carrying value as it is stated after discounts applied by the Bank of England and other central banks to instruments, within the secondary liquidity portfolio, eligible for discounting.
Funding sources The table below shows the carrying values of the principal funding sources.
Short-term Long-term Short-term Long-term less than more than less than more than
Operations. (2) Cash collateral includes £10,002 million (2015 - £9,504 million) from financial institutions.
Loans and Loans and advances to Customer Funding advances to Customer Funding customers (1) deposits (2) LDR surplus/(gap) (3) customers (1) deposits (2) LDR surplus/(gap) (3)
• The loan:deposit ratio was 91%, up from 89% at the end of 2015 as loans grew more than deposits.
Subordinated Total notes Total notes paper and CDs bonds liabilities in issue in issue
The contractual maturity of balance sheet assets and liabilities reflects the maturity transformation role banks perform, lending long-term but obtaining funding predominantly through short-term liabilities such as customer deposits. In practice, the behavioural profiles of many liabilities exhibit greater stability and longer maturity than the contractual maturity. This is particularly true of many types of retail and corporate deposits which, despite being repayable on demand or at short notice, have demonstrated very stable characteristics even in periods of acute stress. In its analysis to assess and manage asset and liability maturity gaps RBS determines the expected customer behaviour through qualitative and quantitative techniques, incorporating observed customer behaviours over long periods of time. This analysis is subject to governance through ALCos down to a segment level.
Less than Greater than Less than Greater than Less than Greater than Less than Greater than 1 year 1-5 years 5 years Total 1 year1-5 years 5 years Total 1 year1-5 years 5 years Total 1 year 1-5 years 5 years Total 2016 £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn
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.
Less than 6 months More than excluding 1 month -1 year Subtotal 5 years HFT
Balance sheet encumbrance Encumbered as a result of transactions with Pre-positioned Unencumbered assets not pre-positioned counterparties other than central banks & encumbered with central banks
Covered assets held bonds & Repos & at central Readily Other Cannot securitisation Derivatives similar (2) Total banks (4) available available be used Total Total
Notes: (1) Covered bonds and securitisations include securitisations, conduits and covered bonds. (2) Repos and other secured deposits, cash, coin and nostro balance held with the Bank of England as collateral against deposits and notes in circulation are included here rather than within those positioned at the central bank as they are part of normal banking operations. (3) Total assets encumbered as a result of transactions with counterparties other than central banks are those that have been pledged to provide security and are therefore not available to secure funding or to meet other collateral needs. (4) Assets pre-positioned at the central banks include loans provided as security as part of funding schemes and those encumbered under such schemes. (5) Readily available for encumbrance: including assets that have been enabled for use with central banks but not pre-positioned; cash and high quality debt securities that form part of RBS’s liquidity portfolio and unencumbered debt securities. (6) Other assets that are capable of being encumbered 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.
Business risk arises as a result of RBS’s exposure to the macroenvironment, to the competitive environment, and to technological changes. In addition, internal factors such as volatility in sales volumes, and input costs, and other operational risks such as RBS’s ability to assess the business operating environment, or to execute its chosen strategy, contribute to business risk.
The Board has ultimate responsibility for business risk and for approving strategic plans, initiatives and changes to strategic direction.
Business risk is reported, assessed and challenged at every governance level within the organisation. Each franchise monitors its financial performance relative to plans and reports this on a regular basis to the finance directors of each franchise.
RBS operates a monthly rolling forecasting process to identify projected changes in, or risks to, key financial metrics, and ensures appropriate actions are taken.
Sustainable Banking Committee are responsible for overseeing how RBS manages its reputation. The Board’s oversight of reputational issues is supported by the senior RBS-wide
Reputational Risk Forum (RRF) which opines on cases that represent a material reputational risk to the whole organisation.
Forum (ERF), also acts as a central forum to review sector or theme-specific reputational risk acceptance positions, including
We can clearly demonstrate that our business model is consistent with our strategy and serves our customers well while balancing the commercial needs of the bank
We have robust systems and controls in place to prevent financial crime
RBS’s response to it. As set out in the Litigation, investigations and reviews section in Note 31 on the consolidated accounts,
• The remediation of PPI continued, with the FCA due to update on policy during the first quarter of 2017.
Provisioning was increased by £601 million principally to cover the potential pushing back of the time bar.
Central Bank of Ireland on the treatment of customers who were sold mortgages with a tracker interest rate or with a tracker interest rate entitlement.
Packaged Bank Accounts, NatWest was required to provide an attestation that it is compliant with FCA rules.
Instruments Directive and Regulation (MiFID II/MiFIR) was delayed by a year to January 2018, while UK and EU
The Conduct Risk Appetite Framework was established in 2015 and continues to be embedded across RBS.
The Conduct Risk Appetite Framework is divided into seven pillars, ensuring that conduct risk exposures are understood and managed in accordance with agreed risk appetite. The Conduct
Other activities undertaken to address regulatory risk included: • Migration to simpler, principle-based policies with accountable executives identified and roles, accountabilities and responsibilities defined; • Roll-out of RBS-wide policies, processes and strategic systems to identify and manage conflicts of interest better; • Enhancement of the RBS-wide surveillance programme; and
RBS defines appropriate standards of conduct and drives adherence to those standards through its framework for managing conduct and regulatory risk. The Board and its senior committees receive updates on conduct risk exposures and action plans through regular reporting.
Plans to merge parts of the C&RA function with Risk management were announced in December 2016 to take effect from 1 January 2017. The change is designed to take advantage of synergies across the risk, conduct and regulatory agendas.
RBS-wide requirements. The policies ensure RBS meets its regulatory obligations. They also provide the necessary clarity to staff on their conduct obligations.
RBS’s Regulatory Affairs department separately oversees regulatory developments, interactions with regulators and regulatory approvals for individuals.
Assurance and monitoring activities are essential to measure the extent to which RBS manages its delivery of specific customer outcomes.
Scenario analysis is used to assess the impact 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.
The Board and senior RBS committees receive updates on conduct risk exposures and action plans through monthly reporting. The reporting is intended to be focused, forwardlooking and action-oriented.
AML laws and regulations. In addition, it covers the systems and controls in place to prevent the financing of terrorism and to ensure compliance with sanctions as well as embargoes and export controls.
The policy encompasses both the legislative definition contained within the Public Interest Disclosure Act 1998 and the regulatory definition within FCA and PRA regulations and guidance. It extends these to include conduct or behaviour which does not meet the expected bank standards documented in Our Code.
The whistleblowing report identifies underlying trends and highlights the outcomes of investigations.
Early identification and effective management of changes in legislation and regulation are critical to the successful mitigation of conduct and regulatory risk. The effects of all changes are managed to ensure timely compliance readiness. Changes assessed as having a ‘High’ or ‘Medium-High’ impact are managed closely.
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or external events.
Operational risk may arise from a failure to manage operations, systems, transactions and assets appropriately. This can take the form of human error, an inability to deliver change adequately or on time, the non-availability of technology services, or the loss of customer data. Fraud and theft are sources of operational risk, as is the impact of natural and man-made disasters. It can also arise from a failure to account for changes in law or regulations or to take appropriate measures to protect assets.
The year also saw a continued focus on the risks arising from the execution of major projects, including the Transformation programme, the restructuring of NatWest Markets (formerly CIB), preparations for the implementation of the Independent
There was also a continued strong focus on RBS’s enhanced risk and control assessment methodology. This approach enhances understanding of the risk profile for the most critical products and services. As a core aspect of the Controls
The external fraud threat environment across the industry continued to escalate in 2016, with this trend predicted to continue. RBS has put in place a collective bank-wide response plan to the increased threat. This aligns fraud prevention programmes across the bank with the objective of mitigating the customer and financial impacts of external fraud. The plan successfully delivered key strategic programmes in 2016 that enhanced RBS’s fraud prevention and detection capabilities, enabling it to limit the impact of fraudulent activity on its customers. As a result RBS recorded an increase in its fraud detection rates in the second half of 2016. RBS is also supporting an industry-led education initiative in 2017-2018 which will offer advice to help the public protect themselves from preventable financial fraud. The initiative is led by Financial Fraud Action UK
Ltd and is being delivered in conjunction with the Home Office, law enforcement and other banks.
The information and cyber security risk facing RBS continues to change in line with the constantly evolving threat environment in which it operates. Internal security improvement programmes continue to progress RBS-wide, developing new, and strengthening existing controls to protect RBS and its customers.
RBS continuously develops and utilises pro-active threat management and intelligence processes to understand, manage and mitigate credible threats.
Throughout 2016 RBS has decommissioned a number of internet-facing websites thus reducing the attack surface visible to external parties such as hackers and fraudsters. Improvements have also been made to access controls for RBS systems.
Internal training programmes continue to ensure all employees are fully aware of the constant threats facing RBS and remain vigilant to unauthorised attempts by internal or external parties to access systems and data.
A strong Operational Risk management function is vital to support RBS’s ambitions to serve its customers better. Improved management of operational risk against a defined appetite directly supports the strategic risk objective of improving stakeholder confidence and is vital for stability and reputational integrity.
The Operational Risk function, part of the second line of defence, undertakes a leadership role and is tasked with delivering a robust operational risk management framework and culture across RBS. The Director of Operational Risk reports to the Chief
The Operational Risk function is responsible for the design, development, delivery and continuous improvement of the operational risk management framework. The Operational Risk
Policy is incorporated into the RBS Policy Framework and provides direction for the consistent identification, assessment, management, monitoring and reporting of operational risk.
Compliance report section on page 112), and certain requirements of the UK Corporate Governance Code.
The operational risk appetite framework supports effective management of key operational risks. It expresses the level and types of operational risk the bank is willing to accept in order to achieve its strategic objectives and business plans.
It provides for an aggregate view of risk appetite, risk and control profile, loss and event data management and control environment.
Above these sit an RBS-level operational risk appetite statement which encompasses the full range of operational risks. This drives the strategic risk measurement of stakeholder confidence and is reviewed annually by the ERF. The statement is supported by three simple measures: (i) the relationship between operational risk losses and RBS’s gross income; (ii) metrics covering control environment performance; and (iii) the requirement for the material RBS-wide operational risks to be managed within risk appetite.
Across all business areas, risk and control assessments are used to identify and assess material operational and conduct risks and key controls. To support identification of risk concentrations, all risks and controls are mapped to the risk directory. Risk assessments are refreshed at least annually to ensure they remain relevant and capture any emerging risks.
During 2016, work continued on rolling out and embedding the enhanced end-to-end risk and control assessment methodology originally developed in 2015. This approach, which strengthens understanding of the risk profile of key products and services, is used to identify and quantify the most material operational risks.
Subject matter experts and key stakeholders are engaged from across RBS to underpin management action in line with RBS’s financial and non-financial appetite statement. Assessments were carried out on a number of critical products and services during 2016. The results of these assessments support RBS’s on-going journey to build on, and enhance, its control environment.
These key controls are regularly assessed for adequacy and tested for effectiveness. The control testing results are monitored and, where a material change in performance is identified, it results in a re-evaluation of the associated risk.
Monitoring and reporting are part of RBS’s operational risk management processes, which aim to ensure that risks are identified, considered by senior executives, and managed effectively. The most material operational risks and their position relevant to risk appetite are regularly reviewed at the OREC, along with any emerging risks and the actions taken to mitigate them. These are also reported to the BRC and the ERF.
Clients, products and business practices 6,282 3,449 99% 98% 13% 14%
Execution, delivery and process management 15 23 — 1% 8% 7%
RBS has exposure to pension risk through its defined benefit schemes worldwide. The five largest schemes, which represent around 97% of RBS’s pension liabilities are: the Main Section of
Scotland International Pension Trust. The Main scheme is the principal source of pension risk. Further detail on the Group’s pension obligations can be found in Note 4 on the consolidated accounts.
RBS is exposed to the risk that the schemes’ assets, together with future returns and additional future contributions, are insufficient to meet liabilities as they fall due. In such circumstances, RBS could be obliged (or might choose) to make additional contributions to the schemes, or be required to hold additional capital to mitigate this risk.
The Government intends that GMP should be equalised but until the mechanism is defined, pension funds are uncertain of their obligations. In the meantime, no allowance is made for GMP
Throughout 2016, various pension risk stress-testing initiatives were undertaken, focused both on internally defined scenarios and on scenarios to meet integrated Bank of England and
RBS. The PC also serves as a formal link between RBS, RIEL
Investment policy for the schemes is defined by the trustee with input from RIEL and other specialist advisers employed by the trustee. While the trustee is responsible for the management of the scheme assets, it consults with RBS on material changes to the Main scheme’s risk appetite and investment policy.
RBS maintains an independent view of the risk inherent in pension funds, with an associated risk appetite, and has defined metrics against which risk is measured. In addition to the scrutiny provided by the PC, RBS undertakes regular pension risk monitoring and reporting to the Board and the BRC on the material pension schemes that RBS has an obligation to support.
Conduct Report. The report includes a measurement of the overall deficit or surplus position, estimated capital requirements, and an assessment of the associated assets and liabilities.
England. The stress testing framework includes pension risk capital calculations for the purposes of the ICAAP as well as additional stress tests for a number of internal management purposes.
RBS’s balance sheet, income statement and capital position are incorporated into the overall RBS-wide stress test results.
Fall in AA credit spreads of 0.25% at all durations with no change in nominal or real swap yields or other credit spreads 9 2,074 (2,065) Fall in equity values of 10% (905) — (905)
Fall in AA credit spreads of 0.25% at all durations with no change in nominal or real swap yields or other credit spreads 7 1,526 (1,519) Fall in equity values of 10% (667) — (667)
The chart below shows the pension liability cash flow profile, allowing for expected indexation of future payments. The majority of expected cash flows (80%) are anticipated within the next 40 years. The profile will vary depending on the assumptions made regarding inflation expectations and mortality.
• Wholesale credit risk management o Risk mitigation o Problem debt management - Forbearance o Key credit portfolios - Commercial Real Estate LTV
• Personal credit risk management o Problem debt management - Forbearance o Overview of personal portfolios - Forbearance, mortgage balances, and LTV distribution.
The principal sources of credit risk for RBS are as follows: Lending - RBS offers a number of lending products that involve an obligation to provide credit facilities to customers. To mitigate the risk of loss, security may be obtained in the form of physical collateral (such as commercial real estate assets and residential property) or financial collateral (such as cash and bonds).
Other activities - RBS is exposed to settlement risk through its activities in foreign exchange, trade finance and payments.
UK personal lending - The increase in the UK Personal portfolio was driven by significant mortgage lending activity. Underwriting standards are constantly monitored to ensure that they remain adequate in the current market environment and were not weakened to sustain the growth observed during the period. The
UK unsecured lending portfolio remained stable during the year with no material changes to asset quality.
Shipping - RBS is winding down its shipping portfolio and has also disposed of assets during the year. RBS continues to witness difficult market conditions which are affecting vessel values and contributing to high levels of forbearance and impairments.
Credit risk measurement - RBS has changed its measure of credit risk exposure from Credit Risk Assets (CRA) to Current
IFRS 9 - The new IFRS 9 accounting requirement for loan impairments will draw extensively on the bank’s risk models and measures in the calculation of expected credit loss required by the standard. A cross-functional programme involving teams in
The key elements of the credit risk management function are set out below.
Leadership GCCO The GCCO has overall responsibility for the credit risk function. The GCCO chairs the Credit Risk
Governance Credit Risk Committees The Wholesale Credit Risk Committee and the
Retail Credit Risk Committee have authority for risk appetite (within appetite set by the board), strategy, frameworks and policy as well as oversight of RBS’s credit profile.
The Provisions Committee has authority over provisions adequacy and to approve recommendations from business provisions committees in accordance with approval thresholds.
Wholesale frameworks are maintained to ensure that the risk of an outsized loss due to concentration to a particular borrower, sector, product type or country remains within appetite. The credit frameworks are aligned to the RBS risk appetite framework.
Assurance activities, as defined by the RBS credit policy, are undertaken by the independent Risk
Customers Segmentation Customers are managed differently reflecting different customer types and risks.
(PE). In these credit risk disclosures the measure used, unless otherwise stated, is Current Exposure. 2015 comparatives have been restated in Current Exposure. The table below summarises the differences between CRA, Current Exposure and Potential Exposure: CRA Current Exposure Potential Exposure (1)
Measured using the mark-to-market value of derivatives after the effect of enforceable netting agreements and net of legally enforceable financial collateral. (3)
Measured using scaled credit limit utilisation, which takes into account mark-to-market movements, any collateral held and expected market movements over a specified horizon. (2,3)
Current and Potential Exposures are measured net of CVA unless otherwise stated.
Notes: Potential Exposure includes all drawn exposure and all legally committed undrawn exposure.
Capital Resolution. The increased current exposure value, compared to CRA, is also a result of risk transfer related to guarantees (pledged by sovereign customers) for obligors active in other sectors.
Each customer is assigned a probability of default (PD) rating and corresponding grade. PD is calculated using a combination of quantitative inputs, such as recent financial performance, and qualitative inputs such as management performance and sector outlook.
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 decision-making through the use of a statistically-derived scorecard.
Loss given default (LGD) models estimate the amount that would not be recovered in the event of a 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.
Exposure at default (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. EAD estimates for committed and uncommitted facilities are based on historic data on limit utilisation. The estimates are also gross of provisions, as well as cash and gold collateral, and as a result can be higher or lower than Potential
Exposure. In accordance with regulatory requirements, EAD for Lending Exposures must always be equal to, or higher, than the drawn balance sheet amount, though it can be reduced by a legally enforceable netting agreement.
Impact of credit model changes RBS reviews and updates models on an ongoing basis in order to reflect the effects of more recent data, changes to products and portfolios, and new regulatory requirements. The PD models for banks, local authorities, housing associations, property, housebuilders and mortgages were recalibrated during the year.
This resulted in some downwards ratings migrations across internal asset quality bands.
For more information on model governance and review refer to the Models used in Risk section on page 169.
Risk mitigation techniques, as set out in RBS’s credit policies, 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. Mitigation tools applied can include: structuring a security interest in a physical or financial asset; use of credit derivatives, including credit default swaps, credit-linked debt instruments and securitisation structures; and use of guarantees and similar instruments (for example, credit insurance) from related and third parties. When seeking to mitigate risk, at a minimum RBS considers the following: • The suitability of the proposed risk mitigation, particularly if restrictions apply; • The means by which legal certainty is to be established, including required documentation, supportive legal opinions and the steps needed to establish legal rights; • The acceptability of the methodologies to be used for initial and subsequent valuation of collateral, the frequency of valuations and the advance rates given; • The actions which can be taken if the value of collateral or other mitigants is less than needed; • The risk that the value of mitigants and counterparty credit quality may deteriorate simultaneously; • The need to manage concentration risks arising from collateral types; and
The business and credit teams are supported by specialist inhouse documentation teams. RBS uses industry-standard loan and security documentation wherever possible. However, when non-standard documentation is used, external lawyers are employed to review it on a case-by-case basis. Mitigants
For further information refer to the sub-sections on Wholesale credit risk management and Personal credit risk management.
Amounts owed by RBS to a counterparty are netted against amounts the counterparty owes the bank, in accordance with relevant regulatory and internal policies. However, generally, this is only done if a netting agreement is in place. A legal opinion, to the effect that the agreement is enforceable in the relevant jurisdictions, is also required.
A financial asset is impaired if there is objective evidence that the amount, or timing, of future cash flows has been adversely affected. Refer to accounting policies on page 302 for details regarding the quantification of impairment losses.
Days-past-due measures are typically used to identify evidence of impairment. In both Wholesale and Personal portfolios, a period of 90 days past due is used. In sovereign portfolios, the period used is 180 days past due. Indicators of impairment include the borrower’s financial condition; a forbearance event; a loan restructuring; the probability of bankruptcy; or evidence of diminished cash flows.
In addition, for secured lending, key assumptions relate to the valuation of the security and collateral held, as well as the timing and cost of asset disposals based on underlying market depth and liquidity. Assessments are made by relationship managers on a case-by-case basis for individually-assessed provisions and are validated by credit teams. The Restructuring Credit team will ultimately recommend or approve any provisions that may be required under their delegated authority. For individual impairments greater than £1 million, oversight is provided by the
Impaired loans and receivables are written-off when there is no longer any realistic prospect of recovery of part, or the entire 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. For details of the typical time frames, from initial impairment to write off, for collectively assessed portfolios refer to the accounting policies section on 301.
Personal other FIs Sovereigns (2) Property resources Transport Other Total 2015**
Notes: (1) Includes SME customers managed in UK PBB Business Banking who are assigned a sector under the Bank’s sector concentration framework. (2) Includes exposure to central governments, central banks and sub-sovereigns such as local authorities. (3) Excludes Private Banking, Lombard and Invoice Finance exposures which are not material in context of the Risk of Credit Loss portfolio. (4) Completed during the year. (5) Forbearance stock: Wholesale forbearance stock represents loans that have been subject to a forbearance event in the two years up to the reported date. Personal forbearance stock is aligned to the European Banking Authority definition for forbearance reporting (refer to individual Personal section on page 234 for further details).
The following key portfolios are either designated highoversight sectors under the sector framework or constitute a material proportion of Current Exposure and are discussed in more detail below.
Ireland, Western Europe and the US and is discussed in further detail on page 216.
• The increase in credit risk exposure in the personal sector was predominantly driven by growth in UK mortgage lending. This portfolio is managed on a specific risk appetite framework and the growth observed the year was within risk appetite. For further information refer to
AQ4 making up 67% of personal lending against 63% in 2015. For the Wholesale portfolio AQ1-AQ4 made up
• The Risk of Credit Loss framework was fully implemented in April 2016. Exposure classified as Risk of Credit Loss decreased during 2016 due to customers who defaulted during the year and are shown in AQ10.
• For Wholesale, the flow into forbearance remained stable and continued to reflect the challenging conditions in certain sectors, notably Transport. 45% (2015 - 29%) of the total forbearance granted related to non-performing loans. Provision coverage of non-performing forborne loans was 27% (2015 - 43%). Refer to the Wholesale
• The reduction in defaulted exposures during the year was primarily due to specific portfolio disposals, including in the Republic of Ireland of small and medium enterpriserelated exposures and buy-to-let mortgages, during the fourth quarter of 2016. This was partly offset by higher defaulted assets in Capital Resolution’s Shipping portfolio.
• Credit impairment charges increased during 2016. In particular large individual charges were incurred in the
• In Personal, including mortgages, the flow into defaults was broadly stable year-on-year. Cash repayments and recoveries on previously defaulted debt remained strong.
The table below summarises both Current and Potential Exposure, net of provisions and after risk transfer by geographic region, as well as providing further detail for selected country risk exposure.
Eurozone other (5) Germany 70 1,789 26,107 74 137 223 1,057 29,457 34,761 RoI (3) 15,079 433 2,387 950 443 206 2,966 22,464 23,771 Netherlands 32 2,399 4,740 235 230 118 563 8,317 12,217 France 69 1,835 3,170 288 563 611 578 7,114 15,299 Belgium 21 1,067 869 44 48 178 17 2,244 2,905 Luxembourg 9 703 28 490 1 41 274 1,546 2,736 Other (6) 14 365 674 47 22 72 261 1,455 2,383 2015** UK 136,024 21,187 60,068 37,328 7,386 9,524 43,262 314,779 365,407 RoI (3) 13,440 433 1,624 692 436 218 2,542 19,385 20,661 Other Western Europe 548 9,481 33,942 2,408 2,144 2,567 4,334 55,424 84,143 US 301 8,121 21,819 622 864 911 2,386 35,024 54,120 RoW (4) 2,806 7,050 6,141 808 952 6,115 2,328 26,200 30,126
• Country Risk exposure was significantly affected by foreign exchange movements (£10.4 billion) during the year. On a constant currency basis, eurozone exposure decreased by
• The proportion of RBS’s exposure to the UK is now 74%
Wholesale credit risk framework* A summary of the frameworks is set out below.
Size - based on exposure to a product or asset class; and risk - based on heightened risk characteristics of a product.
PE is used it is net of eligible collateral and provisions.
Net/gross - dependent on type of risk and limit definition. Where PE is used it is net of eligible collateral and provisions.
during the year. The top ten SNC excesses comprised 87.7% of total
The product and asset class framework was enhanced during the year to encompass all products and asset classes where there is a specific identified credit risk which needs to be managed at the product and asset class level rather than at customer or sector level.
The level of delegated authority held by approvers is dependent on their experience and expertise. Only a small number of senior executives hold the highest authority provided under the CAF.
Both business and credit approvers are accountable for the quality of each decision taken but the credit risk approver holds ultimate sanctioning authority.
When assessing credit risk the following must be considered at a minimum: • The amount, terms, tenor, structure, conditions, purpose and appropriateness of all credit facilities; • Compliance with relevant credit policies and transaction acceptance standards; • The customer’s ability to meet obligations, based on an analysis of financial information; • A review of payment and covenant compliance history; • The customer’s risk profile, including sector, sensitivity to economic and market developments and management capability; • Legal capacity of the customer to engage in the transaction; • Credit risk mitigation including requirements for valuation and revaluation. The customer’s credit grade and the loss given default estimate for the facilities, including any expected changes; • The requirement for the provision of financial information, covenants and/or monitoring formulae to monitor the customer’s financial performance; *unaudited
RBS mitigates credit risk relating to Wholesale customers through the use of netting, collateral and market standard documentation, depending on the nature of the counterparty and its assets. The most common types of mitigation are: • Commercial real estate - Refer to CRE section on page 224.
• Other physical assets - Including 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 ways, depending on the type of asset and may rely on balance sheet valuations in certain cases.
• Receivables - These are amounts owed to RBS’s counterparties by their own customers. RBS values them after taking into account the quality of its counterparty’s receivable management processes and excluding any that are past due.
• Financial collateral - Refer to Counterparty credit risk section on page 211.
All collateral is assessed case by case to ensure that it will retain its value independently of the provider. RBS monitors the value of the collateral and, if there is a shortfall, will seek additional collateral.
Key sectors where RBS provides asset-backed lending are commercial real estate and shipping. Valuation methodologies are detailed below.
They are contracted through a single service agreement to ensure consistency of quality and advice. Valuations are commissioned when an asset is taken as security; a material increase in a facility is requested; or an event of default is anticipated or has occurred. In the UK, RBS also applies an independent third-party market indexation to update external valuations once they are more than a year old.
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 publiclylisted customer’s share price. If EWIs show a customer is experiencing potential or actual difficulty, or if relationship managers or credit officers identify other signs of financial difficulty they may decide to classify the customer within the Risk of Credit Loss Framework.
The Risk of Credit Loss framework, which was fully implemented in April 2016, has replaced RBS’s previous Watchlist process for managing problem debts. The new framework focuses on
Monitoring and Risk of Credit Loss. The framework also applies to those customers that have met the bank’s default criteria
Loss a number of mandatory actions are taken in accordance with RBS-wide policies. This includes a review of the customer’s credit grade, facility and security documentation and the valuation of security. 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
Agreed customer management strategies are regularly monitored by both the business and credit teams. The largest Risk of Credit
Appropriate corrective action is taken when circumstances emerge that may affect the customer’s ability to service its debt
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. All customers granted forbearance are classified
These customers are, where necessary, managed by specialised problem debt management teams, depending on the size of exposure or the Business Banking recoveries team where a loan has been impaired.
An assessment of the viability of the business, as well as the ability of management to deal with the causes of financial difficulty, is carried out by specialists in Restructuring, focusing on both financial and operational issues. Following the assessment, options which may include forbearance and/or restructuring of facilities are developed. Credit risk decisions, including reviewing and approving any restructuring solutions in relation to these customers, are made by a dedicated
Restructuring Credit team, which is part of the credit risk management function.
May be granted to improve the customer’s liquidity or in the expectation that the customer’s liquidity will recover when market conditions improve. In addition, they may be granted if the customer will benefit from access to alternative sources of liquidity, such as an issue of equity capital. These options have been used in CRE transactions, particularly during periods where a shortage of market liquidity has ruled out immediate refinancing and made short-term collateral sales unattractive.
• Insolvency - Where there is no suitable forbearance option or the business is no longer sustainable, insolvency will be considered. Insolvency may be the only option that ensures that the assets of the business are properly and efficiently distributed to relevant creditors.
Forbearance may result in the value of the outstanding debt exceeding the present value of the estimated future cash flows.
For performing loans, credit metrics are an integral part of the latent provision methodology and therefore the impact of covenant concessions will be reflected in the latent provision. For non-performing loans, covenant concessions will be considered in determining the overall provision for these loans.
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 types. This includes only the forborne facility Current Exposure net of provisions and after risk transfer. No exit criteria are currently applied. 2016 2015**
Note: (1) Provision coverage reflects impairment provision as a percentage of non-performing loans gross of provisions.
Forbearance arrangements The table below shows the main types of Wholesale renegotiations. This includes only the forborne facility Current Exposure net of provisions and after risk transfer.
**Restated - refer to page 209 for further details. 2015 data is unaudited.
• Loans totalling £1.4 billion were granted approval for forbearance but had not yet reached legal completion at 31
related to performing loans. The principal types of arrangements offered were payment concessions and loan rescheduling.
• £1.6 billion of the facilities granted forbearance in 2016 were managed by Restructuring Credit. This equated to 48% of loans managed by Restructuring Credit (excluding loans to customers where recovery procedures have commenced).
• By value, 77% (£1.7 billion) of the performing loans granted forbearance in 2015 (£2.2 billion) remained performing at 31
• Provisions for non-performing loans disclosed above are for the most part individually assessed. As a result, material provisions and associated fluctuations in coverage levels can impact direct comparison across periods. Provision coverage decreased in 2016, which is reflective of the proportion of the 2015 forborne portfolio relating to Exit portfolios where the strategy resulted in high levels of provisions. Provision coverage for non-performing "in process" loans was 29%. Additional provisions charged in 2016 and relating to loans forborne during 2015 totalled £160 million. Provision coverage of these loans at 31
• The data presented above include loans forborne during 2015 and 2014. Until April 2014 a reporting threshold was in place which ranged from nil to £3 million after which no thresholds were in use. A number of immaterial portfolios have forbearance assessed under a portfolio approach.
Credit risk: management basis continued Key credit portfolios Commercial Real Estate
CRE lending exposure by geography and property type on a Current Exposure basis net of provisions and after risk transfer*
UK RoI Europe US RoW Total £m £m £m £m £m £m
Notes: (1) Based on management estimates using the postcode of the security. Percentages are based on current exposure gross of provisions.
NatWest Markets. Remaining exposures with LTVs greater than 100% are legacy transactions.
• The exposure in Other relates mainly to lending to large corporate entities. It is not asset-backed but lent against corporate balance sheets.
AQ1 AQ2 AQ3 AQ4 AQ5 AQ6 AQ7 AQ8 AQ9 AQ10 £ m ill io n s
REIL as a % of gross loans to customers 5.4% 12.9% 4.0% 5.8% 41.7% 68.6%
Asset quality* A breakdown of asset quality of the CRE portfolio measured on a Current Exposure basis, net of provisions and after risk transfer, is set out below.**
Note: (1) There is little variation between CE and PE figures for the CRE portfolio as facilities tend to be fully drawn.
Natural Resources* Exposure to the Natural Resources sector, measured on both a Current Exposure (CE) and Potential Exposure (PE) basis, net of provisions and after risk transfer, is summarised below.
CE Resolution PE Resolution CE Resolution PE Resolution £m £m £m £m £m £m £m £m
Oil and gas 2,911 159 5,286 191 3,544 1,539 6,798 2,117 Mining and metals 623 32 1,887 126 729 237 1,823 391 Electricity 3,430 797 9,076 1,087 2,851 1,128 7,683 1,773 Water and waste 5,436 3,386 9,176 6,041 4,657 1,648 8,261 3,039
• Oil & Gas - CE and PE decreased during the year by 27%
• Electricity - CE and PE increased during the year by 9% and 5% (£0.3 billion and £0.4 billion) on a constant currency basis, with foreign exchange impact of £0.3 billion (CE) and £1.0 billion (PE). This was mainly due to refined classification of exposure in the natural resources sector which lead to a transfer of regulated utility exposure from Oil and Gas to Electricity and an increase in Project Finance exposure as part of the RBS growth strategy.
Producers (including international oil companies) 664 — 1,087 2 236 1,989 Oilfield service providers 701 9 630 68 5 1,413 Other wholesale and trading activities 489 43 542 46 280 1,400 Refineries 27 — — 285 3 315 Pipelines 33 4 121 1 10 169
Of which: National oil companies — — 16 — 76 92 International oil companies 450 — 821 155 14 1,440 Exploration and production 302 — 154 2 141 599 2015**
Of which: National oil companies — — 21 — 70 91 International oil companies 654 — 868 273 10 1,805 Exploration and production 338 — 38 130 118 624
Note: (1) Comprises Asia Pacific, Central and Eastern Europe, the Middle East, Central Asia and Africa.
A breakdown of asset quality for the oil and gas portfolio, measured on both a Current Exposure and Potential Exposure basis, net of provisions and after risk transfer, is summarised below.**
producers around implementing production cuts of 1.8 million barrels a day. However, there is considerable market uncertainty around future oil prices and the outlook for the sector remains challenging.
• The portfolio reduced by £1.5 billion during the year or 22%
Regulated gas distribution companies are no longer reported under the Oil and Gas sector and this reclassification reduced sector exposure by £724 million.
• The risk management strategy during the year remained to focus the portfolio towards investment grade customers with robust credit profiles and strong liquidity to manage through the extended downturn. At 31 December 2016, 71% (2015 76 %) of the portfolio exposure was investment grade (AQ1-
• The other principal components of exposure to producers are International Oil Companies (IOCs) and National Oil
• The number and value of cases on the Risk of Credit Loss framework in the Oil & Gas sector decreased during the year. The framework exposure is predominantly classified as Heightened Monitoring and the sector continues to be monitored closely. At 31 December 2016, exposures classified as Risk of Credit Loss totalled £2 million.
Note: (1) Comprises Asia Pacific, Central and Eastern Europe, the Middle East, Central Asia and Africa
Of which: Of which: Of which: Of which: Current Capital Potential Capital Current Capital Potential Capital Exposure Resolution Exposure Resolution Exposure Resolution Exposure Resolution £m £m £m £m £m £m £m £m
Asset quality A breakdown of asset quality for the Shipping sector, measured on both a Current Exposure and Potential Exposure basis, net of provisions and after risk transfer, is summarised below.**
Exposure basis (down 43% or £3.4 billion on a constant currency basis compared with 2015, with foreign exchange impact of £1.2 billion) and £5.2 billion on a
Potential Exposure basis (down 40% or £3.4 billion on a constant currency basis compared with 2015, with foreign exchange impact of £1.3 billion).
• Conditions remained depressed in the Dry Bulk market, notwithstanding a gradual improvement during the second half of the year. The Container market also saw a marked downturn in 2016 with a significant reduction in spot rates and vessel values and this is set to continue into 2017. Tanker rates also weakened in 2016 with a general deterioration in vessel values.
LTV is reflective of the market and vessel value movements outlined above. The LTV calculation includes vessel security only and does not incorporate any nonvessel security such as cash or guarantees.
Credit Loss totalled £363 million reflecting the prolonged market downturn in this sector.
Forbearance takes place when a concession is made on the contractual terms of a loan in response to a customer's financial difficulties.
The type of forbearance granted will differ based upon an assessment of the customer's circumstances. Forbearance is granted principally to customers with mortgages and less frequently to customers with unsecured loans. This includes instances where forbearance may be taken for customers with highly flexible mortgages.
Additionally for some forbearance types a loan may be transferred to the performing book (following a probationary period) if a customer makes payments that reduce loan arrears below 90 days (Ulster Bank RoI, UK PBB collections function).
model: • UK PBB (excl. NI) and W&G: forborne mortgages form a separate risk pool for 24 months after the agreement of forbearance and the calculation uses the higher of the observed default rates or PD. On unsecured loans, separate risk pools are used for the duration of the forbearance treatment.
The PD model used is calibrated separately for forborne loans, using information on the historic performance of loans subject to similar arrangements.
For non-performing loans, there is no difference in treatment with the exception of Ulster Bank, where forborne loans which result in an economic loss to the group form a separate risk pool where specific LGDs are allocated using observed cohort performance.
Of which: Mixed (capital and interest only) 5,316 75 — 23 687 6,101
Of which: Mixed (capital and interest only) 5,380 76 7 29 745 6,237
Notes: (1) Excludes loans guaranteed by a company and commercial real estate lending to personal customers. (2) Weighted by current exposure gross of provisions.
Credit risk: management basis continued Overview of new mortgage lending on a Current Exposure basis net of provisions* Ulster Private
UK PBB Bank RoI Banking RBSI W&G Total 2016 £m £m £m £m £m £m
Of which: Average LTV by weighted value 71% 74% 55% 69% 70% 70%
Of which: Average LTV by weighted value 71% 77% 54% 64% 69% 69%
Of which: buy-to-let 4,374 6,879 2,202 431 131 34 30 14 1 14,096 2 14,098
• The total portfolio increased by 11.9% from 31 December 2015. This was in line with the segment’s growth strategy and within risk appetite. The portfolio is closely monitored and risk appetite is regularly reviewed to ensure it is appropriate for market conditions. Underwriting standards were not relaxed during the year.
(excluding additional lending to existing customers) in 2016 with an average LTV by weighted value of 69% (2015 69 %). Lending to owner-occupiers during this period was £25.1 billion (2015 - £18.9 billion) and had an average LTV
by weighted value of 71% (2015 - 71%). Buy-to-let lending was £3.9 billion (2015 - £3.8 billion) with an average LTV by
• Based on the Halifax House Price Index at September 2016, the portfolio average indexed LTV by volume was 50%
• The arrears rate (three or more repayments past due) fell from 0.8% (by volume) in December 2015 to 0.7% at 31
LTV ratio value <=50% <=70% <=80% <=90% <=100% <=110% <=130% <=150% >150% LTVs LTV Other Total
Credit risk: management basis continued The table below shows interest only mortgage portfolios (excluding mixed repayment mortgages) by type and by contractual year of maturity.
• Excluding the impact of exchange rate movements, the portfolio decreased by 2.9% (£433 million) from 31
• At 31 December 2016, 26% of total mortgage assets (£3.7 billion) were subject to a forbearance arrangement, an increase of 2% (£66 million) from 31 December 2015.
Excluding the impact of exchange rate movements of £606 million, the value of mortgage assets subject to a forbearance arrangement decreased by £540 million (13%).
• A key driver of both reduced forbearance rates and longer average forbearance durations was the introduction of Ulster
Bank RoI’s sustainability policy in the fourth quarter of 2015. Under that policy customers are only eligible for forbearance as part of a sustainable solution. The use of forbearance is therefore more limited than previously, applying only to those customers who can be returned to a sustainable status through forbearance.
There was a very high provision coverage in relation to this portfolio and, as a result, the disposal also led to a reduction in provision coverage.
• The majority of the Private Banking personal lending portfolio related to mortgage lending. The net portfolio increase was £616 million (9.4%) from 31 December 2015, in line with the segment’s growth strategy and risk appetite.
• Gross new mortgage lending amounted to £3.3 billion in 2016. Lending to owner-occupiers during the period was £2.8 billion (2015 - £2.2 billion) and had an average LTV by weighted value of 55% (2015 - 54%). Buy-to-let lending was £472 million (2015 - £222 million) with an average LTV by
• Fixed interest rate products accounted for approximately 41% of the mortgage portfolio, with two-year term products accounting for 58% of all fixed deals.
Notes: (1) 2017 includes pre-2017 maturity exposure. (2) 2016 includes pre-2016 maturity exposure.
• The total portfolio increased by 4% from £2.6 billion to £2.7 billion from 31 December 2015 in line with the franchise’s growth strategy and risk appetite.
• The arrears rate increased from 0.75% in December 2015 to 0.78% at the end of December 2016.
• There was a provision impairment charge of £8.5 million for personal mortgages in 2016 (release of £1 million in 2015.
• The total portfolio increased by 3.74% from 31 December 2015, driven by gross new mortgage lending amounting to £2.2 billion in 2016 but remained within risk appetite.
Balance the scope of Disposal and differences and scope of sheet market risk (1) groups (2) collateral (3) reclassifications (4) CE (5) CE
Cash and balances at central banks 79.4 — 0.5 — (0.2) (3.9) 75.8
Reverse repurchase agreements and stock borrowing (6) 39.8 — — (37.3) — — 2.5
Notes: (1) The exposures in regulatory trading book businesses are subject to market risk and are hence excluded from current exposure. (2) Amounts reclassified to balance sheet lines. (3) Primarily includes: - Reverse repos: reflects 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.
(4) Primarily includes cash management pooling arrangements not allowed under IFRS for Loans and Advances. - Settlement balances: exposure not included in current exposure measure
Gross IFRS Carrying Balance sheet Real estate and other Credit mitigation and exposure offset (1) value (2) offset (3) Cash (5) Securities (6) Residential (7) Commercial (7)enhancement (8) enhancement £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn
Government Securities Clearing Corporation. During 2016, changes in the legal contracts with LCH led to many derivatives cleared through that counterparty being settled to market each day rather than being collateralised as previously. This led to the derecognition of the associated assets and liabilities.
The asset quality analysis presented below is based on internal asset quality ratings which have ranges for the probability of default. 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 254 to 256.
Cash and balances at central banks 74.2 — 0.1 — — — — — — — — — — 74.3
Cash and balances at central banks 77.5 — 2.3 0.1 — — — — — — — — — 79.9
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.
• UK PBB: mortgage growth of £13.8 billion was the principal driver of the £11.4 billion gross lending increase in 2016.
• Ulster Bank RoI: customer lending increased by £1.5 billion reflecting new lending, invoice finance and foreign exchange movements, partially offset by portfolio sales and repayments.
• Private Banking: lending growth of £1.0 billion primarily mortgage lending.
• Capital Resolution: lending fell by £14.9 billion including wind downs and disposals of Markets (£5.2 billion), GTS
• REIL and loan impairment provisions declined by £1.8 billion and £2.7 billion to £10.3 billion and £4.5 billion respectively.
Impairment charge and provisions The tables below analyse the categories of loan impairment losses/(releases) and provisions by reportable segment.
Central items & other — — — — 1 — — 1
Gross as a % of as a % as a % of losses/ Amounts loans REIL Provisions gross loans of REIL gross loans (releases) written-off of which: commercial real estate 26,265 1,407 511 5.4 36 1.9 (184) 1,483
Note: (1) Mortgages are reported in sectors other than personal mortgages by certain businesses based on the nature of the relationship with the customer.
Gross as a % of as a % as a % of losses/ Amounts loans REIL Provisions gross loans of REIL gross loans (release) written-off of which: commercial real estate 27,630 3,560 2,054 12.9 58 7.4 (811) 6,151
PBB RoI Banking Banking International Resolution W&G & other Total Total £m £m £m £m £m £m £m £m £m £m
Currency translation and other adjustments — 557 — — 9 445 — 2 1,013 (860)
The table below analyses REIL between UK and overseas, based on the location of the lending office. 2016 2015 Impaired loans Accruing past due Impaired loans Accruing past due £m £m £m £m
Credit risk: balance sheet analysis continued Provisions The tables below analyse provisions by segment.
Currency translation and other adjustments — 215 8 — 3 — 253 — 1 480 (562)
Repayments and disposals — — — — — — — — — — (554)
The table below analyses debt securities by issuer and IFRS measurement classifications. The other financial institutions category includes US government sponsored agencies and securitisation entities, the latter principally relating to asset-backed securities (ABS).
Ratings are based on the lowest of Standard & Poor’s, Moody’s and Fitch.
AFS reserves (gross of tax) 79 (66) 190 5 144 (6) 346 46
Of which US agencies — — — — 806 — 806 —
Total sponsored Non- CDOs & Other or similar (2) conforming CLOs ABS
Notes: (1) Residential mortgage-backed securities (RMBS) and commercial mortgaged-backed securities (CMBS) are securities that represent an interest in a portfolio of residential and commercial mortgages respectively. Repayments made on the underlying mortgages are used to make payments to holders of the mortgage-backed securities (MBS). The risk of the MBS will vary primarily depending on the quality and geographic region in which the underlying mortgage assets are located and the credit enhancement of the securitisation structure. Several tranches of notes are issued, each secured against the same portfolio of mortgages, but providing differing levels of seniority to match the risk appetite of investors. The most junior (or equity) notes will suffer early capital and interest losses experienced by the referenced mortgage collateral, with each more senior note benefiting from the protection provided by the subordinated notes below. Additional credit enhancements may be provided to the holder of senior MBS notes. The main categories of mortgages that serve as collateral to RMBS held by RBS are set out below and described in the Glossary on page 475. The US market has more established definitions of differing underlying mortgage quality and these are used as the basis for RBS's RMBS categorisation.
Banks institutions (2) Corporate HFT Banks institutions (2) Corporate AFS/DFV Total reserves £m £m £m £m £m £m £m £m £m £m
(2) Transactions with securitisation vehicles and funds where collateral posting is contingent on RBS’s external rating. (3) Predominantly large corporate with whom RBS may have netting arrangements in place, but operational capability does not support collateral posting. (4) Sovereigns and supranational entities with one way collateral agreements in their favour. (5) The notional amount of interest rate derivatives include £9,724 billion (2015 - £11,555 billion) in respect of contracts cleared through central clearing counterparties. The associated derivatives assets and liabilities including variation margin reflect IFRS offset of £51 billion (2015 - £124 billion) and £51 billion (2015 - £118 billion) respectively.
• The increase in bid-offer reserves of £30 million mainly reflected sterling weakening against all major currencies.
profile was more reflective of NatWest Markets’ areas of activity in line with its strategic focus.
RBS’s capital framework and directly supports the strategic risk objectives of maintaining capital adequacy and delivering stable earnings growth.
Other products are not transacted on an exchange. Of these over-the-counter 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 211.
NTIRR comprises three primary risk factors: gap risk, basis risk and option risk. For more information, refer to page 268.
Credit spread risk arises from the potential adverse economic impact of a move in the spread between bond yields and swap rates, where the bond portfolios are accounted at fair value in the non-trading book.
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 joint arrangements and related currency funding where it differs from sterling.
Non-traded equity risk is the potential variation in income and reserves arising from changes in the values of non-trading book equity positions. Equity exposures may arise through strategic acquisitions, venture capital investments and certain restructuring arrangements.
Accounting volatility risk arises when a non-trading book exposure is accounted for at amortised cost but economically hedged by a derivative that is accounted for at fair value.
Responsibility for identifying, measuring, monitoring and controlling the market risk arising from trading or non-trading activities lies with the relevant trading or non-trading business, with second-line-of-defence oversight provided by the Market
The ERF approves market risk frameworks. Market risk policy statements set out the governance and risk management framework through effective identification, measurement, reporting, mitigation, monitoring and control.
For information on risk controls and assurance, refer to page 169.
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 function.
The Market Risk function also prepares daily risk reports that detail exposures against a more granular set of limits and triggers.
In addition, as noted under Risk governance above, regular updates on traded market risk positions are provided to the ERF, the Board Risk Committee, Treasury and the Market Risk
The internal traded VaR model captures all trading book positions including those products approved by the regulator. For an explanation of the distinction between internal VaR and regulatory VaR, refer to page 267.
The internal VaR model captures the potential impact of the following risk factors: • General 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.
VaR limitations* 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.
RBS model uses the previous 500 days of data; this period represents a balance between model responsiveness to recent shocks and risk factor data coverage.
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec £ m
Total Trading VaR General Interest Rate VaR Specific Interest Rate VaR Equity VaR FX VaR Commodity VaR
The table below analyses 1-day 99% internal VaR for RBS’s trading portfolios, segregated by type of market risk exposure. 2016 2015
• On an average basis, total traded VaR decreased in 2016 by 10%. The reduction was mainly driven by lower risk positions during Q1 2016, with reduced market activity reflecting concerns over the stability of the financial sector.
These included, but were not limited to, the US presidential elections, the EU referendum in the UK and central bank actions. However, total traded VaR was managed within risk appetite.
In addition to being a key risk management measure used by
• Ongoing model validation - VaR model performance is assessed both regularly and on an ad-hoc basis if market conditions or book constitution change significantly.
• Statistically RBS would expect to see back-testing exceptions 1% of the time over the 250-day period.
• The exceptions in the Rates business were driven by rates and volatility changes adversely affecting the desk.
• The exceptions in the Credit business were mainly driven by mark-downs and changes in credit default swap spreads.
referendum. In addition, a small number of exceptions were driven in part by movements in the independent price verification reserve.
• The exceptions in the Securitised Products business were mainly due to mark-downs and tightening in credit default swap spreads.
Risk Assessment process, when a risk manager determines that the associated risk is not adequately captured by the VaR model or system; (ii) when risks are mapped to time series that are deemed to be inadequate (for example, due to data quality problems or proxy series usage); or (iii) as a result of a recommendation made during the ongoing model validation or by
RNIVs that are related specifically to instruments that have level 3 valuation hierarchy assumptions (refer to page 336) are mainly included in the following categories: proxied sensitivities or risk factors, higher-order sensitivity terms, and static pricing parameters.
In each of these approaches, potential diversification benefits between RNIVs are ignored.
The RNIV calculations provide the additional capital required to capture the market risks not captured in the internal VaR model and are regularly reported to senior management and the regulator and discussed with them. The methodology used in the material RNIV calculations is internally reviewed by Model Risk
Management. Where appropriate, risk managers set sensitivity limits to monitor specific risk factors. RNIV calculations form an integral part of RBS’s ongoing model and data improvement efforts to capture all market risks in scope for model approval in
VaR. The calculated stresses measure the impact of changes in risk factors on the fair values of the trading and available-for-sale portfolios.
Historical stress testing is a measure that is used for internal management. Using the historical simulation framework employed for VaR, the current portfolio is stressed using historical data since 1 January 2005. The methodology simulates the impact of the 99.9 percentile loss that would be incurred by historical risk factor movements over the period, assuming variable holding periods specific to the risk factors and the businesses.
The cross-risk capital planning process is conducted once a year, in September/October, with a planning horizon of five years. The scenario narratives cover both regulatory scenarios and macroeconomic scenarios identified by the firm.
Vulnerability-based stress testing is used for internal management information and is not subject to limits. However, the results for relevant scenarios are reported to senior management.
P&L forecasts generated by the VaR model before statistics such as VaR and SVaR are extracted.
• Specific equity risks are aggregated with general risks using the simulation-level approach.
while the idiosyncratic component captures the credit spread variability of the underlying entity. The systematic components of specific interest rate risks are aggregated at the simulation level, while the idiosyncratic components are calculated as a standalone charge.
RBS uses two broad methodologies to calculate its market risk capital charge: (i) the standardised or non-modelled approach, whereby regulator-prescribed rules are applied, and (ii) the internal model approach, where, subject to regulatory approval, a model such as VaR is used to calculate the capital charge.
permission with effect from 30 November 2016, incorporating changes to the legal entity coverage of the permission (removal of RBSSI) and minor revisions to its product and trading location coverage. *unaudited
The IRC is mainly driven by three-month credit rating transition, default and correlation parameters. The portfolio impact of correlated defaults and rating changes is assessed by observing changes in the market value of positions using stressed recovery rates and modelled credit spread changes. Revaluation matrices are used to capture any non-linear behaviour.
(31 December 2015 - £21 billion). Minimum capital requirements, which represent 8% of RWAs, were £1.4 billion (31 December
By regulatory approach, the internal model approach accounted for 80% of the total (2015 - 78%). By legal entity, RBS plc accounted for 90% of the total (2015 - 90%).
RBS uses a variety of models to manage and measure market risk. These include pricing models (used for valuation of positions) and risk models (for risk measurement and capital calculation purposes). They are developed in both RBS-level and lower-level functions and are subject to independent review and sign-off.
In addition to MRM’s independent oversight, the model testing team monitors the model performance for market risk through back-testing, which is discussed in more detail on page 265, and other processes.
• Option risk - which arises from option derivative positions or from optional elements embedded in assets, liabilities and/or off-balance sheet items, where RBS or its customer can alter the level and timing of their cash flows. Option risk can be further characterised into automatic option risk and behavioural option risk. One example of behavioural option risk is pipeline risk. This is the risk of loss arising from personal customers owning an option to draw down a loan
(typically a mortgage loan) at a committed rate. Changes in interest rates can result in greater or fewer customers than anticipated taking up the committed offer. The risk depends on customer behaviour as the option will not automatically be exercised.
This task is primarily carried out by RBS Treasury, to which all businesses except NatWest Markets transfer most of their
NTIRR. The main exposures and limit utilisations are reported to the ALCo and the ERF monthly and to the Board Risk Committee quarterly.
VaR measures. The dealing authorities in place for the bond portfolios further mitigate the risk by imposing constraints by duration, asset class and credit rating. Exposures and limit utilisations are reported to senior management on a daily basis as well as to the Executive Risk Forum monthly and to the Board
The only material non-traded open currency positions are the structural foreign exchange exposures arising from investments in foreign subsidiaries, branches and associates and their related currency funding. These exposures are assessed and managed by RBS Treasury to predefined risk appetite levels under delegated authority from the ALCo. Treasury seeks to limit the potential volatility impact on RBS’s CET1 ratio from exchange rate movements by maintaining a structural open currency position. Gains or losses arising from the retranslation of net investments in overseas operations are recognised in equity reserves and reduce the sensitivity of capital ratios to foreign exchange rate movements primarily arising from the retranslation of non-sterling-denominated RWAs. Sensitivity is minimised where, for a given currency, the ratio of the structural open position to RWAs equals RBS’s CET1 ratio. The sensitivity of the
Chief Executive, the Chief Financial Officer or as otherwise required. Decisions to acquire or hold equity positions in the nontrading 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.
Accounting volatility can be mitigated through hedge accounting whereby RBS can mitigate the profit and loss impact of the derivatives by marking the exposure to market. However, volatility will remain in cases where accounting rules mean that hedge accounting is not an option. Accounting volatility is reported to the ALCo monthly and capitalised as part of the
The market risk exposures that arise as a result of RBS’s retail and commercial banking activities are measured using a combination of value-based metrics (VaR and sensitivities) and earnings-based metrics, as explained in greater detail for each of the key non-traded risk exposure types disclosed in this section.
• The rise in credit spread VaR reflected the increase in the proportion of bonds held within Treasury’s liquidity portfolio and the increased volatility in the market data captured in the VaR. (For more information on the liquidity bond portfolio, refer to the Liquidity and funding risk section.)
Sensitivity of net interest income* Earnings sensitivity to rate movements is derived from a central forecast over a 12-month period. A simplified scenario is shown based on the period-end balance sheet assuming that noninterest rate variables remain constant. Market implied forward rates are used to generate a base case earnings forecast, which is then subjected to interest rate shocks. The variance between the central forecast and the shock gives an indication of underlying sensitivity to interest rate movements.
However, reported sensitivities should not be considered predictive of future performance. They do not capture potential management action in response to sudden changes in the interest rate environment. Actions that could reduce the net interest income sensitivity and mitigate adverse impacts are changes in pricing strategies on both customer loans and deposits as well as hedging. Management action may also be targeted at stabilising total income taking into account noninterest income in addition to net interest income.
Euro Sterling US dollar Other Total 2016 £m £m £m £m £m
Structural hedging* RBS has the benefit of a significant pool of stable, non and low interest bearing liabilities, principally comprising equity and money transmission accounts. These balances are usually hedged, either by investing directly in longer-term fixed rate assets or by the use of interest rate swaps, in order to provide a consistent and predictable revenue stream.
The balances are primarily hedged with medium-term interest rate swaps, so that reported income is less sensitive to movements in short-term interest rates. The size and term of the hedge are based on the stability of the underlying portfolio.
Banking and RBS International. RBS Treasury allocates income to products or equity in structural hedges by reference to the relevant interest rate swap curve after hedging the net interest rate exposure of the bank externally. This internal allocation has been developed over time alongside the bank’s external hedging programme and provides a basis for stable income attribution to the product and equity hedges.
• The incremental impact of product hedges on net interest income above 3-month LIBOR remained positive in 2016.
• At 31 December 2016, the 5-year swap rate was 0.74%
compared with 1.9% one year previously. The market rate matching the amortising structure of the equity hedge was 0.9%.
• Structural foreign currency exposure at 31 December 2016 was £6 billion before and £3 billion after economic hedges, respectively, £1.6 billion and £1.5 billion lower than at 31
The calculation captures the principal sources of non-traded market risk – interest rate risk, credit spread risk, structural foreign exchange risk and accounting volatility risk.
The table below analyses RBS’s balance sheet by trading and non-trading business. 2016 2015 Trading Non-trading Trading Non-trading
Cash and balances at central banks 74.3 0.1 74.2 79.9 — 79.9 Interest rate
Net loans and advances to banks 17.3 6.9 10.4 19.0 11.2 7.8 Interest rate
Derivatives 247.2 244.2 3.0 262.5 260.0 2.5 Interest rate, credit spreads
Debt securities in issue 27.3 4.4 22.9 31.1 7.1 24.0 Interest rate
Short positions 22.1 22.1 — 20.8 20.8 — Interest rate, credit spreads
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 263. (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 270 to 275.
Union and as applied in accordance with the provisions of the Companies Act 2006; and
• Consolidated balance sheet as at 31 December 2016; • Balance sheet as at 31 December 2016; • Consolidated income statement for the year then ended; • Statement of changes in equity for the year then ended; • Consolidated statement of comprehensive income for the year then ended; • Cash flow statement for the year then ended; and
• Consolidated statement of changes in equity for the year then ended; • Related notes 1 to 15 to the financial statements.
• Consolidated cash flow statement for the year then ended; • Related notes 1 to 41 to the financial statements; and
The financial reporting framework that has been applied in their preparation is applicable law and 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.
• Future profitability estimates impacting the recognition of deferred tax goodwill and, in the parent company accounts, investments in subsidiaries.
• Valuation of financial instruments with higher risk characteristics including related income from trading activities.
• We performed an audit of the complete financial information of five components and audit procedures on specific balances for a further four components.
Materiality • Overall Group materiality has been set at £270 million which represents 0.5% of total equity.
Following our selection, we undertook procedures to establish our independence of the Group. This involved ceasing commercial relationships and changing financial arrangements as independent auditor and ensuring that all staff who work on the audit worldwide are independent of the Group. We used the time prior to commencing any audit work to gain an understanding of the business issues and meet with key management.
We became independent in July 2015 from which time we shadowed the former auditors through the 31 December 2015 year-end audit process, gaining an understanding of the Group’s processes, including the risk assessment and key judgements made by the former auditors. Alongside the predecessor auditor we attended key meetings with management, met the non-executive directors and attended the Group Audit Committee and the Business Risk Committee as observers.
We used the understanding the audit team had formed to establish our audit base and assist in the formalisation of our audit strategy for the 2016 Group audit. This involved gaining an understanding of the Group’s key processes and controls over financial reporting.
The continued litigious environment and the heightened regulatory scrutiny gives rise to a high level of judgement in determining appropriate provisions and disclosures. At the year end, the Group has reported £12.8 billion (2015: £7.4 billion) of provisions for liabilities and charges, including £11.0 billion for conduct and litigation claims.
• UK shareholder - After mediation in July 2016, an agreement was reached with four of the five groups of claimants.
• PPI – Provision increased during the year from £1.0 billion to £1.3 billion to reflect an extension of the period in which claims could be made
• FCA review of RBS’s treatment of SMEs - The Bank raised a provision of £400 million for costs associated with a new complaints review process and the automatic refund of complex fees.
The measurement of the provision is based on the best estimate of the expenditure required to settle the present obligation.
• Measurement of provisions recognised: Integrity and completeness of data, and the appropriateness of assumptions and judgements used in the estimation of material provisions.
We also considered historical data and whether this supported current estimates. Our conduct risk specialists were involved to consider how the Group’s provisions compare to the latest industry developments in key matters.
We also assessed the disclosure provided on conduct, litigation and regulatory provisions to determine whether it complied with accounting standards.
Management’s estimate was within our range of possible outcomes based on reasonable alternative assumptions.
The recognition and carrying value of deferred tax assets, goodwill and, in the parent company accounts, investments in subsidiaries are based on estimates of future profitability which require significant management judgement. At year end the
(2015: £5.6 billion) and deferred tax assets of £1.8 billion (2015: £2.6 billion). The parent company has reported investments in billion).
In testing for impairment, the Group estimates the value in use of its cash generating units.
• Cost forecasts impacted by the Group’s transformation programme and reorganisation.
• Assumptions regarding the economic consequences of the EU referendum and other political developments over an extended period.
With the support of our valuation specialists, we tested whether key macroeconomic assumptions used in the Group’s forecasting process were in line with our expectations. We assessed how these forecasts impacted the carrying value of deferred tax, goodwill and investments.
With the support of our taxation specialists, we assessed the estimate of future taxable profits to calculate the level of deferred tax assets recognised on the balance sheet including the time horizon used for recoverability of losses and other temporary differences.
We assessed how management considered alternative assumptions and performed sensitivity analysis on the assumptions used. We considered how key events, such as banking Structural Reform and the EU referendum impacted management’s estimates.
We have focused on the following critical judgements and estimates which could give rise to material misstatement or are potentially subject to management bias: • Completeness and timing of recognition of loss events in accordance with criteria set out in IAS 39.
• For individually assessed provisions, the measurement of the provision is dependent on the valuation of collateral, the timing of cash flows and realisations.
• For modelled provisions, the measurement is dependent upon key assumptions relating to probability of default and recovery rates.
• Assessment and approval of material impairment provisions including valuation of collateral.
We examined the methodology to establish model parameters and assessed the appropriateness of the models used. Where possible, assumptions were benchmarked against pillar 3, EBA
stress tests and our internally developed ranges. Where overlays were made as a result of limitations in existing models, we confirmed the extent of the model shortcoming, recalculated the overlay and assessed the appropriateness of the adjustment.
Based on current economic events, we considered the need for sector or systemic overlay adjustments.
For non-performing loans, we tested a sample of loan reviews, focusing on high risk sectors such as shipping, oil and gas and commercial real estate. With the support of our valuation specialists, we assessed the measurement of the provision by testing the valuation of collateral where relevant. We examined other cash flow assumptions where the level of provision is not dependent on collateral values. We also assessed the reasonableness of the timing of the cash flows estimated.
Valuation of financial instruments with higher risk characteristics including related income from trading activities
The valuation of financial instruments with higher risk characteristics involves both significant judgment and risk of inappropriate revenue recognition through mis-marking. The judgement in estimating fair value of these instruments can involve complex valuation models and significant fair value adjustments both of which may be reliant on data inputs where there is limited market observability. At year end the Group reported level 3 assets £4.5 billion (2015 - £3.9 billion) and level 3 liabilities £3.0 billion (2015 £2.7 billion).
• Instruments valued using illiquid pricing inputs, which are aligned with material positions defined as level 3 within RBS’s
IFRS 7 fair value hierarchy disclosure. These include interest rate derivative instruments whose valuation is dependent upon the correlation between certain interest rates and rarely traded debt securities.
• Fair value adjustments made to uncollateralised derivatives to reflect funding risk and counterparty credit risk. These include
Valuation Adjustments (CVA) relating to derivative counterparties whose credit spread is less readily able to be determined.
We performed trade life-cycle product walkthroughs to confirm our understanding of RBS’s process and controls in the area of revenue recognition relating to financial instruments with higher risk characteristics.
We tested the design and operating effectiveness of the Group’s controls over financial instrument valuations, including independent price verification, model governance, and P&L
• Our testing on complex model-dependent valuations involved the specialist review of detailed model documentation and the building of a number of bespoke EY
challenger models to analyse and challenge judgements and assumptions applied within each relevant model.
• Our testing on fair value adjustments for counterparty credit and funding risk on uncollateralised derivatives involved: (i)
• Where differences were identified between our independent valuation and management’s valuation, we performed additional testing over each variance to support our assessment of the appropriateness of the fair value. This work included our own analysis of: (i) recent trade activity, involving new trades and trade exits to back-test key valuation judgements, (ii) collateral disputes to compare to counterparty valuations, (iii) P&L attribution, particularly unexplained P&L in the year for the relevant instruments and (iv) associated valuation adjustments e.g. model fair value adjustments to reflect the associated uncertainty given lack of market data.
We tested the design and operating effectiveness of key controls including the performance, review and approval of monthly hedge effectiveness testing performed by management.
We highlighted that hedge ineffectiveness is correctly recorded in the income statement and we concurred with management’s assessment that there are no hedge relationships that should have been discontinued. We concluded on the effectiveness of controls in place over hedge accounting as at year end.
The valuations of the retirement benefit liabilities are calculated with reference to a number of actuarial assumptions and inputs including discount rate, rate of inflation and mortality rates. Small changes in assumptions can impact the pension liability and asset disclosures.
With the support of our actuarial specialists we determined whether the assumptions used to value the retirement benefit liabilities met the requirements of accounting standards and were in line with market practice, as well as the specific circumstances of the schemes and their participants. This included a comparison of life expectancy assumptions with relevant mortality tables, benchmarking inflation and discount rates against external market data, considering changes in historical assumptions and evaluating the independence, qualifications and results of work performed by management’s experts involved in the valuation process.
We also reviewed Board and Executive Committee minutes where the pension valuation was discussed to assess the effectiveness of management’s review process and the appropriateness of the conclusions reached.
We highlighted the results of our internal benchmarking of key actuarial assumptions including the discount rate, inflation, mortality, and the rate of increase of salary and pension payments. We noted that assumptions tested are within a reasonable range. We also presented the results of our independent valuation of a sample of pension assets.
We tested the design and operating effectiveness of the Group’s IT access controls over the information systems that are critical to financial reporting. We tested IT general controls (logical access, changes management and aspects of IT operational controls). This included testing that requests for access to systems were appropriately reviewed and authorised. We tested the Group’s periodic review of access rights. We inspected requests of changes to systems for appropriate approval and authorisation. We considered the control environment relating to various interfaces, configuration and other application layer controls identified as key to our audit.
A number of user access related deficiencies were identified. Management identified compensating controls to mitigate these findings and undertook additional work to evidence that access was not used inappropriately. We tested the work undertaken by management and performed additional audit procedures over impacted balances.
Our risks of material misstatement are consistent with the risks identified by the predecessor auditor in the prior year, with the exception of our inclusion of hedge effectiveness volatility including non-interest income from trading activities. We included this additional risk in consideration of the judgemental nature and the impact it could have on earnings, given its significance in 2016.
Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each component of the Group. Taken together, this enables us to form an opinion on the financial statements. We take into account the size and risk profile of the component and its activities, the organisation of the Group and effectiveness of group-wide controls, changes in the business environment and other factors such as recent internal audit results when assessing the level of work to be performed at each component.
Our audit of the significant components covers the reportable segments identified in the financial statements, together with the central functions of the Group based in the UK and overseas, and includes Finance, the Services function and Treasury. In assessing the risk of material misstatement to the Group financial statements, and to establish that we had adequate quantitative coverage of significant accounts in the financial statements, we selected nine components covering activities in the UK and 10 other countries, which represent the principal business units within the Group. Our audit scope was consistent with that of the predecessor auditor in 2015.
The table below illustrates the coverage obtained from the work performed by our audit teams. As the Group made a loss during the year, we considered total assets, total revenue, total equity and the absolute value of the amounts in the income statement (meaning the magnitude of the amounts without regard to their positive or negative value) to verify we had appropriate overall coverage on the income statement.
The primary audit engagement team interacted regularly with the component audit teams where appropriate throughout the course of the audit, which included holding planning meetings, maintaining regular communications on the status of the audits, reviewing key working papers and responsibility for the scope and direction of the audit process. The primary audit engagement team also participated in meetings with key management personnel in the components and, for certain overseas locations, implemented a programme of planned visits. These visits involved discussing the audit approach with the component team and any issues arising from their work, as well as meeting with local management. This, together with the additional procedures performed at Group level, gave us appropriate evidence for our opinion on the Group financial statements.
We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in forming our audit opinion.
The magnitude of omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of the financial statements materiality provides a basis for determining the nature and extent of our audit procedures.
We determined materiality for the Group to be £270 million (predecessor auditor 2015 materiality: £300 million), which was calculated as 0.5% of the total equity of the Group. This represented 5% of the Group’s loss for the year. We considered that equity represented a relevant measure used by investors, regulators and other stakeholders when assessing the Group. Our materiality was based on the equity of the Group given the significant losses and volatility of results in recent years, which is consistent with the basis used by the predecessor auditor in the prior year.
Note: (1) Full scope: audit procedures on all significant accounts (2) Specific scope: audit procedures on selected accounts (3) Other procedures: considered in analytical procedures
On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, our judgement was that performance materiality was 50% of our planning materiality, namely £135 million. We have set performance materiality at this percentage (which is at the lowest end of the range) as this is our initial year of audit of the Group.
We evaluate any uncorrected misstatements against both the quantitative and qualitative measures of materiality discussed above and in light of other relevant qualitative considerations in forming our opinion.
As explained more fully in the Directors’ Responsibilities Statement set out on page 115, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and
o the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements.
We are required to report to you if, in our opinion, financial and non-financial information in the Annual Report and Accounts is: • materially inconsistent with the information in the audited financial statements; or
• apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit; or
In light of the knowledge and understanding of the Company and its environment obtained in the course of the audit, we have identified no material misstatements in the Strategic Report or Directors’ Report.
We are required to report to you if, in our opinion: • adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or
Report to be audited are not in agreement with the accounting records and returns; or
We are required to review: • the directors’ statement in relation to going concern, set out on page 119, and longerterm viability, set out on page 119; and
• the part of the Corporate Governance Statement relating to the company’s compliance with the provisions of the UK Corporate Governance Code specified for our review.
Statement on the directors’ assessment of the principal risks that would threaten the solvency or liquidity of the entity
• the directors’ explanation in the Annual Report and Accounts as to how they have assessed the prospects of the entity, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
for and on behalf of Ernst & Young LLP, Statutory Auditor
Profit/(loss) from discontinued operations, net of tax 18 — 1,541 (3,445)
Basic and diluted (loss)/earnings from continuing operations 7 (59.5p) (27.7p) 0.5p
Basic and diluted loss from continuing and discontinued operations 7 (59.5p) (17.2p) (30.6p)
Recycled to profit or loss on disposal of businesses (5) — — 36
Recycled to profit or loss on ceding control of Citizens (6) — 9 —
Recycled to profit or loss on ceding control of Citizens (7) — (36) —
Recycled to profit or loss on disposal of businesses (8) (40) 4 —
(2) In September 2016, non-cumulative US dollar preference shares were redeemed at their original issue price of US$1.5 billion (2015 - $1.9 billion). The nominal value of £0.3 million (2015 - £1 million) was transferred from share capital to capital redemption reserve and ordinary owners equity was reduced by £0.4 billion (2015 - £0.2 billion)
(3) Paid-in equity reclassified to liabilities as a result of the call of RBS Capital Trust C in May 2016 (redeemed in July 2016), the call of RBS Capital Trust IV in January 2015
(redeemed in March 2015) and the call RBS Capital Trust III in December 2014 (redeemed in January 2015).
(9) Includes £2,491 million relating to the secondary offering of Citizens in March 2015 (2014 - £2,117 million relating to the IPO of Citizens).
Adjustments for non-cash items and other adjustments included within income statement (3,024) (5,601) (84)
IFRS). The EU has not adopted the complete text of IAS 39
‘Financial Instruments: Recognition and Measurement’; it has relaxed some of the standard's hedging requirements. The Group has not taken advantage of this relaxation: its financial statements are prepared in accordance with IFRS as issued by the IASB.
Companies Act 2006. With the exception of investment property and certain financial instruments as described in Accounting policies 9, 14, 16 and 23, the accounts are presented on an historical cost basis.
The Group adopted a number of revisions to IFRSs effective 1
issued in May 2014 amends IFRS 11 ‘Joint Arrangements’. An acquirer of an interest in a joint operation that is a business applies the relevant principles for business combinations in IFRS
Amortisation’ issued in May 2014 amends IAS 16 ‘Property, Plant and Equipment’ and IAS 38 ‘Intangible Assets’ requiring amortisation to be based on the consumption of an asset, introducing a rebuttable presumption that this is not achieved by an amortisation profile aligned to revenue.
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. Negative effective interest accruing to financial assets is presented in interest payable.
The application of this policy to significant fee types is outlined below.
(when benefits are introduced or changed so that the present value of the defined benefit obligation increases) or negative
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.
Goodwill arises on the acquisition of a joint venture when the cost of investment exceeds the Group’s share of the net fair value of the joint venture’s identifiable assets and liabilities. Goodwill is measured at initial cost less any subsequent impairment losses.
Depreciation is charged to profit or loss on a straight-line basis so as to write-off the depreciable amount of property, plant and equipment (including assets owned and let on operating leases)
At each balance sheet date, the Group assesses whether there is any indication that its intangible assets, or property, plant and equipment are impaired. If any such indication exists, the Group estimates the recoverable amount of the asset and the impairment loss if any. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired.
Fair value is based on current prices for similar properties in the same location and condition. 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. Lease incentives granted are recognised as an integral part of the total rental income.
Rental income from operating leases is recognised in income on a straight-line basis over the lease term unless another systematic basis better represents the time pattern of the asset’s use. Operating lease assets are included within Property, plant and equipment and depreciated over their useful lives (see
The Group recognises a provision for a present obligation resulting from a past event when it is more likely than not that it will be required to transfer economic benefits to settle the obligation and the amount of the obligation can be estimated reliably.
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. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that they will be recovered.
Designated as at fair value through profit or loss - financial assets may be designated as at fair value through profit or loss only if such designation (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
The Group typically regards the foreseeable future for this purpose as twelve months from the date of reclassification.
Fair value - the Group’s approach to determining the fair value of financial instruments measured at fair value is set out in the section of Critical accounting policies and key sources of estimation uncertainty entitled Fair value - financial instruments.
Historical loss experience is adjusted, on the basis of observable data, to reflect current conditions not affecting the period of historical experience. Impairment losses are recognised in profit or loss and the carrying amount of the financial asset or group of financial assets reduced by establishing an allowance for impairment losses. If, in a subsequent period, the amount of the impairment loss reduces and the reduction can be ascribed to an event after the impairment was recognised, the previously recognised loss is reversed by adjusting the allowance. Once an impairment loss has been recognised on a financial asset or group of financial assets, interest income is recognised on the carrying amount using the rate of interest at which estimated future cash flows were discounted in measuring impairment.
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.
Held-for-trading - a financial liability is classified as held-fortrading if it is incurred principally for repurchase in the near term, or forms part of a portfolio of financial instruments that are managed together and for which there is evidence of short-term profit taking, or it is a derivative (not in a qualifying hedge relationship). Held-for-trading financial liabilities are recognised at fair value with transaction costs being recognised in profit or loss.
Subsequently they are measured at fair value. Gains and losses are recognised in profit or loss as they arise.
Group is party to a number of arrangements, including master netting agreements, that give it the right to offset financial assets and financial liabilities, but where it does not intend to settle the amounts net or simultaneously, the assets and liabilities concerned are presented gross.
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.
An associate is an entity over which the Group has significant influence. A joint venture is one which it controls jointly with other parties. 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.
The cost of employee services received in exchange for an award of shares or share options granted is measured by reference to the fair value of the shares or share options on the date the award is granted and takes into account non-vesting conditions and market performance conditions (conditions related to the market price of RBSG shares): an award is treated as vesting irrespective of whether any market performance condition or non-vesting condition is met. The fair value of options granted is estimated using valuation techniques which incorporate exercise price, term, risk-free interest rates, the current share price and its expected volatility. The cost is expensed on a straight-line basis over the vesting period (the period during which all the specified vesting conditions must be satisfied) with a corresponding increase in equity in an equity-settled award, or a corresponding liability in a cash-settled award. The cost is adjusted for vesting conditions (other than market performance conditions) so as to reflect the number of shares or share options that actually vest.
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 Reporting’.
The Group capitalises goodwill arising on the acquisition of businesses, as discussed in Accounting policy 6. The carrying value of goodwill as at 31 December 2016 was £5,558 million
Protection Insurance, £1,253 million (2015 - £996 million), other customer redress, £1,105 million (2015 - £821 million), residential million), litigation and other regulatory proceedings, £1,918 million (2015 - £519 million). Provisions are liabilities of uncertain timing or amount, and are recognised when there is a present obligation as a result of a past event, the outflow of economic benefit is probable and the outflow can be estimated reliably.
Payment Protection Insurance - the Group has established a provision for redress payable in respect of the mis-selling of
Payment Protection Insurance policies. The provision is management’s best estimate of the anticipated costs of redress and related administration expenses. The determination of appropriate assumptions to underpin the provision requires significant judgement by management. The principal assumptions underlying the provision together with sensitivities to changes in those assumptions are given in Note 20 on the accounts.
Provisions for litigation - the Group and members of the Group are party to legal proceedings in the United Kingdom, the United
Once it is determined there is an obligation, assessing the probability of economic outflows and estimating the amount of any liability can be very difficult. In many proceedings, it is not possible to determine whether any loss is probable or to estimate the amount of any loss.
Group incurring a liability. A detailed description of the Group’s material legal proceedings and a discussion of the nature of the associated uncertainties are given in Note 31 on the accounts.
Deferred tax assets of £7,940 million (2015 - £6,349 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 22 on the accounts.
The Group's loan impairment provisions are established to recognise incurred impairment losses in its portfolio of loans classified as loans and receivables and carried at amortised cost in accordance with Accounting policy 16. At 31 December 2016, customer loan impairment provisions amounted to £4,455 million
Collectively assessed provisions are established on a portfolio basis using a present value methodology taking into account the level of arrears, security, past loss experience, credit scores and defaults based on portfolio trends. The most significant factors in establishing these provisions are the expected loss rates and the related average life. These portfolios include mortgages, credit card receivables and other personal lending. The future credit quality of these portfolios is subject to uncertainties that could cause actual credit losses to differ materially from reported loan impairment provisions. These uncertainties include the economic environment, notably interest rates and their effect on customer spending, the unemployment level, payment behaviour and bankruptcy trends. Latent loss provisions are held against estimated impairment losses in the performing portfolio that have yet to be identified as at the balance sheet date. To assess the latent loss within its portfolios, the Group has developed methodologies to estimate the time that an asset can remain impaired within a performing portfolio before it is identified and reported as such.
Statements’ to require disclosure of the movements in financing liabilities. The amendment is effective from 1 January 2017.
In January 2016, the IASB amended IAS 12 ‘Income taxes’ to clarify the recognition of deferred tax assets in respect of unrealised losses. The amendment is effective from 1 January
Financial assets - There are three classifications for financial assets in IFRS 9.
A Group-wide programme has been established to implement the necessary changes in the modelling of credit loss parameters, and the underlying credit management and financial processes; this programme is led jointly by Risk and Finance. The inclusion of loss allowances on all financial assets will tend to result in an increase in overall credit impairment provisions when compared with the current basis of measurement under IAS 39.
Default aligned to loss events, by classing all financial assets for which an impairment event has taken place as nonperforming. Nonperforming assets are defined as those that have a 100% probability of default and an internal asset quality grade of AQ10
Impaired financial assets are those for which there is objective evidence that the amount or timing of future cash flows have been adversely impacted since initial recognition.
For retail exposures, the definition of default may be applied at the level of an individual credit facility rather than in relation to the total obligations of a borrower.
PD is the likelihood of default assessed on the prevailing economic conditions at the reporting date (point in time), adjusted to take into account estimates of future economic conditions that are likely to impact the risk of default; it will not equate to a long run average.
The likelihood that a customer will fail to make full and timely repayment of credit obligations over a one year time horizon.
For Wholesale, PD models reflect losses that would arise through-the-cycle; this represents a long run average view of default levels. For Retail PD models, the prevailing economic conditions at the reporting date (point in time) are used.
The staging assessment requires a definition of when a significant increase in credit risk has occurred; this moves the loss calculation for financial assets from a 12 month horizon to a lifetime horizon.
IFRS 9 includes an option that permits assets that are ‘low risk’ to be excluded from this assessment; the Group does not intend to apply this option.
More than one outcome should be considered to ensure that the resulting estimation of impairment is not biased towards a particular expectation of economic growth.
Financial asset carrying values based upon the expectation of future cash flows.
LGD is a current assessment of the amount that will be recovered in the event of default, taking account of future conditions. It may occasionally equate to the regulatory view.
Regulatory LGD values are generally used for calculating collective and latent provisions.
It differs from the regulatory method as follows: - it includes the effect of amortisation; - it caps exposure at the contractual limit.
Wholesale revolving products: the date of the last substantive credit review (typically annual) or, if later, the date facility became available to the customer. Retail Cards: the account opening date or, if later, the date the card was subject to a regular 3-year review or the date of any subsequent limit increases.
Not applicable for impairment but defined as the date when the entity becomes a party to the contractual provisions of the instrument.
Modification A modification occurs when the contractual cash flows of a financial asset are renegotiated or otherwise modified and the renegotiation or modification does not result in derecognition. A modification requires immediate recognition in the income statement of any impact on the carrying value and EIR. Examples of modification events include forbearance and distressed restructuring. The financial impact is recognised in the income statement as an impairment release/(loss).
‘Leases’. There are no substantial changes to the accounting for leases by lessors. For lessees: accounting for finance leases will remain substantially the same; operating leases will be brought on balance sheet through the recognition of assets representing the contractual rights of use and liabilities will be recognised for the contractual payments. The effective date is 1 January 2019.
Other changes in the fair value of financial assets and liabilities designated as at fair value through profit or loss and related derivatives (13) 375 83
Profit on sale of property, plant and equipment 18 91 137
Loss on disposal or settlement of loans and receivables (277) (558) (232)
Notes: (1) Negative interest on loans and advances is classed as interest payable. (2) Measured as the change in fair value from movements in the year in the credit risk premium payable by RBS. (3) Includes income from activities other than banking.
Pension costs - defined benefit schemes (see Note 4) 267 523 462 - loss/(gain) on curtailments or settlements (see Note 4) 1 (65) —
Write down of goodwill and other intangible assets (see Note 15) 159 1,332 523
Included in operating expenses are the following restructuring and divestment costs. Premises and
Notes: (1) Includes litigation and conduct costs, net of amounts recovered. Further details are provided in Note 20. (2) Includes other administrative expenses, write down of goodwill and other intangible assets.
The average number of persons employed, rounded to the nearest hundred, in continuing operations during the year, excluding temporary staff, was 82,400 (2015 - 88,800; 2014 - 92,800); on the same basis there were no people employed in discontinued operations (2015 - 10,100; 2014 - 18,200). The average number of temporary employees during 2016 was 6,700 (2015 - 7,800; 2014 8, 100). The number of persons employed in continuing operations at 31 December, excluding temporary staff, by reportable segment, was as follows: UK Personal & Business Banking 20,300 24,600 24,400
As described in the Remuneration report on page 110, 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
The fair value of options granted in 2016 was determined using a pricing model that included: expected volatility of shares determined at the grant date based on historical volatility over a period of up to five years; expected option lives that equal the vesting period; no dividends on equity shares; and risk-free interest rates determined from UK gilts with terms matching the expected lives of the options.
December 2016, exercise prices ranged from £1.68 to £4.34 (2015 - £2.33 to £18.93; 2014 - £2.33 to £39.27) and the remaining average contractual life was 2.9 years (2015 - 2.9 years; 2014 - 3.7 years). The fair value of options granted in 2016 was £18 million
The awards granted in 2016 vest in three equal trenches on the first, second and third anniversary of the award.
The following tables analyse the Group variable compensation awards for 2016.
Variable compensation as a % of adjusted operating profit (4) 9% 8%
Less: deferral of charge for amounts awarded for current year (103) (97) (150)
Income statement charge for amounts awarded in current year 240 276 271
Less: forfeiture of amounts deferred from prior years (106) (102) (64)
Income statement charge for amounts deferred from prior years 41 38 137
Variable compensation deferred from 2014 and earlier 204 140 57 39 14
Less: clawback of variable compensation deferred from prior years (3) — — — —
Less: forfeiture of amounts deferred from prior years (64) (102) (106) — —
Westminster Bank Plc. The Trustee is the legal owner of the Main scheme assets which are held separately from the assets of the
Group. The Board of the Trustee comprises four trustee directors nominated by members selected from eligible active staff and pensioner members who apply and six appointed by the Group.
Various changes have been made to the Group’s defined benefit pension schemes to manage pension costs and risks. The
Group announced in October 2016 that, following an extensive consultation process that, it would be increasing employee contributions in its UK defined benefit pension schemes by 2% of salary.
Interim valuations of the Group’s schemes under IAS 19 ‘Employee Benefits’ were prepared at 31 December with the support of independent actuaries, using the following assumptions: Principal IAS 19 actuarial assumptions
The Group discounts its defined benefit pension obligations at discount rates determined by reference to the yield on ‘high quality’ corporate bonds.
corporate bonds from which a single discount rate is derived based on a cash flow profile similar in structure and duration to the pension obligations. The weighted average duration of the
Main scheme’s defined benefit obligation at 31 December 2016 is 20.9 years (2015 – 19.1 years). Significant judgement is required when setting the criteria for bonds to be included in the population from which the yield curve is derived.
The Main scheme’s holdings of derivative instruments are summarised in the table below: Notional Fair value Notional Fair value amounts Assets Liabilities amounts Assets Liabilities £m £m £m £m £m £m
Equity and bond call options 2,157 799 1 6,277 744 1
The investment strategy of other schemes is similar to that of the
Effect of changes in actuarial demographic assumptions (402) (402) (542) (542)
Contributions by plan participants and other scheme members — — — 12 12 —
Main scheme (decrease)/increase in obligation at 31 December £m £m 0.25% increase in the discount rate (1,978) (1,392)
History of defined benefit schemes 2016 2015 2014 2013 2012 2016 2015 2014 2013 2012 £m £m £m £m £m £m £m £m £m £m
Experience gains/(losses) on plan liabilities 658 233 3 102 (232) 794 258 18 176 (207)
Experience gains/(losses) on plan assets 8,562 (415) 4,629 986 301 9,254 (458) 5,171 1,097 485
In January 2016, the Group accelerated the settlement of the future contributions agreed with the Trustee as part of the 31 March 2013 triennial valuation of the Main scheme. This amounted to £4.2 billion. At the same time it entered into a Memorandum of Understanding with the Trustee that included advancing the date of the 31 March 2016 triennial funding valuation to 31 December 2015. Consequently, the next triennial valuation does not need to be agreed until 31 March 2020.
The Trustee of the Main scheme is responsible for setting the actuarial assumptions used in the triennial funding valuation having taken advice from the Scheme Actuary. These represent the Trustee’s prudent estimate of the future experience of the Main scheme taking into account the covenant provided by the Group and the investment strategy of the scheme. They are agreed with the Group and documented in the Statement of Funding Principles.
Rate of increase in pensions in payment (RPI floor 0%, cap 5%): Limited price indexation (LPI) (0,5) swap yield curve
Post retirement mortality assumptions: Longevity at age 60 for current pensioners (years) Male 28.4 28.8
On 24 March 2016 Deloitte LLP (Deloitte) resigned as the Group’s auditors and at the Annual General Meeting on 4 May 2016 the shareholders approved the appointment of Ernst & Young LLP (EY) as the Group’s auditor for the audit of the 2016 annual accounts.
Amounts paid to the Group's auditors for statutory audit and other services are set out below: £m £m
Fees payable to the auditor and its associates for other services to the Group - the audit of the company’s subsidiaries 0.2 19.3
Fees payable to the auditor and its associates for other services to the Group - the audit of the company’s subsidiaries 20.7 —
Group, including securitisations, £0.1 million (2015 - £0.6 million), and no fees in relation to a working capital report in connection with a circular to shareholders (2015 - £0.4 million).
The actual tax charge differs from the expected tax charge computed by applying the standard rate of UK corporation tax of 20% (2015 £m £m £m
Non-taxable items: - gain on sale of Direct Line Insurance Group — — 41
(Loss)/profit from discontinued operations attributable to ordinary shareholders — (1,207) 3,527
(Loss)/profit from continuing operations attributable to ordinary shareholders (6,955) (3,186) 57
Weighted average number of ordinary shares outstanding during the year 11,692 11,516 11,356
Diluted weighted average number of ordinary shares outstanding during the year 11,743 11,576 11,447
Treasury (HMT) set out the terms for the retirement of the
Dividend Access Share (DAS). On 22 March 2016 the DAS was retired on payment the final dividend of £1,193 million to HMT; the DAS was re-designated as a single B share which was then cancelled.
• Earnings per share for periods ended after 25 June 2014 and prior to the retirement of the DAS reflect DAS dividends recognised before the end of a reporting period; this amounted to £1,193 million in respect of the year ended 31
Cash and balances at central banks — — — 74,250 — 74,250
Cash and balances at central banks — — — 79,404 — 79,404
Note: (1) Includes items in the course of collection from other banks of £781 million (2015 - £830 million).
(3) Comprises bonds and medium term notes of £24,037 million (2015 - £30,206 million) and certificates of deposit and other commercial paper of £3,208 million (2015 - £944 million).
Gains on financial assets/liabilities designated as at fair value through profit or loss 13 388 55
Offsetable instruments Offsetable potential not recognised by IFRS Effect of Net amount after Instruments master netting Other the effect of netting outside
Reclassified from HFT to LAR 1,165 1,078 244 — 274 30
Reclassified from HFT to AFS (1) 222 222 23 — 21 (2)
The Modelled Product Review Committee sets the policy for model documentation, testing and review, and prioritises models with significant exposure being reviewed by the RBS Pricing
The Executive Valuation Committee meets quarterly to address key material and subjective valuation issues, to review items escalated by the NatWest Markets and Capital Resolution
Initial classification of a financial instrument is carried out by the
Non-modelled products are valued directly from a price input typically on a position by position basis and include cash, equities and most debt securities.
• Credit spreads - where available, these are derived from prices of credit default swaps or other credit based instruments, such as debt securities. For others, credit spreads are obtained from pricing services. For counterparty credit spreads, adjustments are made to market prices (or parameters) when the creditworthiness of the counterparty differs from that of the assumed counterparty in the market price (or parameters).
• Equity and equity index prices - quoted prices are generally readily available for equity shares listed on the world's major stock exchanges and for major indices on such shares.
• Price volatilities and correlations - volatility is a measure of the tendency of a price to change with time. Correlation measures the degree which two or more prices or other variables are observed to move together.
Resolution contribute to consensus pricing services where there is a significant interest either from a positional point of view or to test models for future business use. Data sourced from consensus pricing services are used for a combination of control processes including direct price testing, evidence of observability and model testing. In practice this means that RBS submits prices for all material positions for which a service is available.
Where unobservable inputs are used, RBS may determine a range of possible valuations derived from differing stress scenarios to determine the sensitivity associated with the valuation. When establishing the fair value of a financial instrument using a valuation technique, RBS considers adjustments to the modelled price which market participants would make when pricing that instrument. Such adjustments include the credit quality of the counterparty and adjustments to compensate for model limitations.
When valuing financial instruments in the trading book, adjustments are made to mid-market valuations to cover bid-offer spread, liquidity and credit risk. A breakdown of valuation adjustments is provided in Capital and risk management: Balance sheet analysis - derivatives on page 258.
Fair value positions are adjusted to bid (long positions) or offer
OIS-related rates at an individual trade level. Uncollateralised derivatives are discounted with reference to funding levels by applying a funding spread over benchmark interest rates on a portfolio basis (funding valuation adjustment).
Funding levels are applied to estimated potential future exposures, the modelling of which is consistent with the approach used in the calculation of CVA. The counterparty contingent nature of the exposures is reflected in the calculation.
(2015 – nil) were reclassified from other categories of Day 1 reserves.
HFT DFV Total liabilities DFV Total Derivatives Total £m £m £m £m £m £m £m
Notes: (1) Includes wholesale and retail note issuances. (2) The reserve movement between periods will not equate to the reported profit or loss for own credit. The balance sheet reserve is stated by conversion of underlying currency balances at spot rates for each period, whereas the income statement includes intra-period foreign exchange sell-offs. (3) The cumulative adjustment for debt securities in issue is opposite to that for subordinated liabilities: debt securities in issue were issued relatively recently at wider than current spreads, whilst many of the subordinated liabilities were issued before the financial crisis at significantly tighter spreads.
December 2016 (31 December 2015 – 54 basis points) at the five year level.
• RBS subordinated debt spreads widened to 281 basis points points) at the five year level.
(4) The determination of an instrument’s level cannot be made at a global product level as a single product type can be in more than one level. For example, a single name corporate credit default swap could be in level 2 or level 3 depending on whether the reference counterparty’s obligations are liquid or illiquid.
(2) Credit spreads and discount margins: credit spreads and margins express the return required over a benchmark rate or index to compensate for the credit risk associated with a cash instrument. A higher credit spread would indicate that the underlying instrument has more credit risk associated with it. Consequently, investors require a higher yield to compensate for the higher risk. the discount rate comprises credit spread or margin plus the benchmark rate; it is used to value future cash flows.
(7) Volatility: a measure of the tendency of a price to change with time. (8) Interest rate delta: these ranges represent the low/high marks on the relevant discounting curve. (9) RBS does not have any material liabilities measured at fair value that are issued with an inseparable third party credit enhancement.
Where markets are liquid, little judgment is required. However, when the information regarding the liquidity in a particular market is not clear, a judgment may need to be made. This can be more difficult as assessing the liquidity of a market is not always straightforward. For an equity traded on an exchange, daily volumes of trading can be seen, but for an over-the-counter
(OTC) derivative assessing the liquidity of the market with no central exchange is more difficult.
A key related matter is where a market moves from liquid to illiquid or vice versa. Where this change is considered to be temporary, the classification is not changed. For example, if there is little market trading in a product on a reporting date but at the previous reporting date and during the intervening period the market has been considered to be liquid, the instrument will continue to be classified in the same level in the hierarchy. This is to provide consistency so that transfers between levels are driven by genuine changes in market liquidity and do not reflect short term or seasonal effects. Material movements between levels are reviewed quarterly.
Non-modelled products are generally quoted on a price basis and can therefore be considered for each of the three levels. This is determined by the market activity, liquidity and valuation uncertainty of the instruments which is in turn measured from the availability of independent data used by the IPV process to allocate positions to IPV quality levels.
However, where an instrument is generally considered to be illiquid, but regular quotes from market participants exist, these instruments may be classified as Level 2 depending on frequency of quotes, other available pricing and whether the quotes are used as part of the IPV process or not.
The following table shows the movement in level 3 assets and liabilities in the year. 2016 2015
Items where fair value approximates Carrying Fair value of hierarchy level carrying value value Fair value Level 1 Level 2 Level 3 2016 £bn £bn £bn £bn £bn £bn
Total loans and advances to customers 307.8 306.0 — 0.9 305.1
Loans and advances to banks 0.8 7.5 7.5 — 3.6 3.9
Total loans and advances to customers 288.7 281.9 — 1.3 280.6
The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Quoted market values are used where available; otherwise, fair values have been estimated based on discounted expected future cash flows and other valuation techniques. These techniques involve uncertainties and require assumptions and judgments covering prepayments, credit risk and discount rates. Furthermore there is a wide range of potential valuation techniques. Changes in these assumptions would significantly affect estimated fair values. The fair values reported would not necessarily be realised in an immediate sale or settlement.
The assumptions and methodologies underlying the calculation of fair values of financial instruments at the balance sheet date are as follows: Short-term financial instruments
In estimating the fair value of loans and advances to banks and customers measured at amortised cost, RBS’s loans are segregated into appropriate portfolios reflecting the characteristics of the constituent loans. Two principal methods are used to estimate fair value: (a) Contractual cash flows are discounted using a market discount rate that incorporates the current spread for the borrower or where this is not observable, the spread for borrowers of a similar credit standing. This method is used for portfolios where counterparties have external ratings: institutional and corporate lending in NatWest Markets.
Loans and advances to customers 115,925 236,025 351,950 111,455 222,437 333,892
The principal amounts of financial assets and liabilities that are repayable after 20 years or where the counterparty has no right to repayment of the principal are excluded from the table, as are interest payments after 20 years.
Loans and advances to banks 11,753 438 47 — — —
Settlement balances and other liabilities 5,673 — — — — —
10 Financial instruments – maturity analysis continued 0-3 months 3-12 months 1-3 years 3-5 years 5-10 years 10-20 years 2015 £m £m £m £m £m £m
Loans and advances to banks 8,143 25 — 26 — —
Loans and advances to customers 45,562 29,421 62,391 51,261 63,928 72,987
Settlement balances and other liabilities 5,276 — — — — —
Unwind of discount (recognised in interest income) (31) (82) — (113) (144)
Notes: (1) Includes nil relating to loans and advances to banks (2015 - £1 million). (2) The table above excludes impairments relating to securities.
Impairment (releases)/losses charged to the income statement 2016 2015 2014 £m £m £m
Notes: (1) Impairment provisions individually assessed. (2) Impairment provisions individually assessed on balances of £4,186 million (2015 - £5,047 million).
Companies within RBS transact derivatives as principal either as a trading activity or to manage balance sheet foreign exchange, interest rate and credit risk.
For cash flow hedge relationships of interest rate risk, the hedged items are actual and forecast variable interest rate cash flows arising from financial assets and financial liabilities with interest rates linked to LIBOR, EURIBOR or the Bank of England Official
Bank Rate. The financial assets are customer loans and the financial liabilities are customer deposits and LIBOR linked medium-term notes and other issued securities. At 31 December 2016 variable rate financial assets of £81 billion (2015 - £77 billion) and variable rate financial liabilities of £55 billion (2015 - £29 billion) were hedged in such cash flow hedge relationships.
and fixed rate financial liabilities of £23 billion (2015 - £21 billion)
Hedge ineffectiveness recognised in other operating income in continuing operations comprised: 2016 2015 2014 £m £m £m
Designated as at fair value through profit or loss — — 25 — 2 — 27 —
Designated as at fair value through profit or loss — — 111 — — — 111 —
Gross gains of £115 million (2015 - £69 million) and gross losses of £107 million (2015 - £133 million) were realised on the sale of available-for-sale securities in continuing operations.
The following table analyses available-for-sale debt securities and the related yield (based on weighted averages) by remaining maturity and issuer. 0-1 years 1-5 years 5-10 years Over 10 years Total
Notes: (1) Includes covered bonds. (2) Includes asset-backed securities issued by US federal agencies and government sponsored entities, and covered bonds.
Gross gains of £73 million (2015 - £61 million) and gross losses of £10 million (2015 - £1 million) were realised on the sale of availablefor -sale equity shares in continuing operations. There were no gains or losses in discontinued operations.
Net book value at 31 December 5,558 922 6,480 5,558 979 6,537
Impairment testing involves the comparison of the carrying value of each cash-generating unit (CGU) with its recoverable amount.
Recoverable amount is the higher of fair value and value in use.
Value in use is the present value of expected future cash flows from the CGU. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants.
Impairment testing 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 CGUs; and the valuation of the separable assets of each business whose goodwill is being reviewed. Sensitivity to the more significant variables in each assessment is presented in the tables on the following page.
The annual review at 31 December 2016 indicated no impairment to goodwill.
Disposals and write-off of fully depreciated assets (52) (175) (35) (118) (228) (496) (1,104)
Write down of property, plant and equipment — 71 — — 7 — 78
Disposals and write-off of fully depreciated assets — (137) (22) (86) (180) (250) (675)
Investment Freehold leasehold leasehold and other lease properties premises premises premises equipment assets Total 2015 £m £m £m £m £m £m £m
Change in fair value of investment properties - continuing operations 2 — — — — — 2
Transfers to disposal groups — (3) — (24) (23) — (50)
Charge for the year - continuing operations — 62 (5) 94 274 153 578
Investment property valuations principally employ present value techniques that discount expected cash flows. Expected cash flows reflect rental income, occupancy and residual market values; valuations are sensitive to changes in these factors. The fair value measurement of non-specialised properties in locations where the market for such properties is active and transparent are categorised as level 2 - 93% (2015 - 94%); otherwise investment property fair value measurements are categorised as
Valuations were carried out by qualified surveyors who are members of the Royal Institution of Chartered Surveyors, or an equivalent overseas body; property with a fair value of £485 million (2015 - £700 million) was valued by independent valuers.
Rental income from investment properties in continuing operations was £79 million (2015 - £79 million). Direct operating expenses of investment properties in continuing operations were 17 Prepayments, accrued income and other assets 2016 2015 £m £m
Pension schemes in net surplus (refer to Note 4) 276 215
The gain on disposal in 2015 in relation to Citizens comprised £248 million on the derecognition of assets and liabilities, and £989 million in respect of reserves reclassified in accordance with IFRS.
Profit/(loss) from Citizens discontinued operation, net of tax — 1,525 (3,486)
Profit from other discontinued operations, net of tax — 16 41
Total profit/(loss) from discontinued operations, net of tax — 1,541 (3,445)
There was no profit from discontinued operations attributable to non-controlling interests (2015 - £334 million; 2014 - £82 million).
(c) Assets and liabilities of disposal groups 2016 2015 £m £m
Disposal groups at 31 December 2015 are primarily International Private Banking (fair value less costs to sell reflects the agreed sale to
Currency translation and other movements — 9 686 61 90 846
(1) To reflect the developments detailed in Note 31, RBS increased its provision for PPI by £601 million in 2016 (2015 - £600 million; 2014 - £650 million), bringing the cumulative charge to £4.9 billion, of which £3.3 billion (67%) in redress and £0.4 billion in administrative expenses had been paid by 31 December 2016. Of the £4.9 billion cumulative charge, £4.5 billion relates to redress and £0.4 billion to administrative expenses.
Single premium book past business review take up rate 57% 58% +/-5 +/-55
(2) RBS has provided for other customer redress, primarily in relation to investment advice in retail and private banking, (2016 – nil: 2015 - £100 million), packaged accounts, (2016 – nil: 2015 - £157 million) and interest rate hedging products, (2016 – nil: 2015 -
(4) RBS is party to certain legal proceedings and regulatory investigations and continues to co-operate with a number of regulators. All such matters are periodically reassessed with the assistance of external professional advisers, where appropriate, to determine the likelihood of RBS incurring a liability and to evaluate the extent to which a reliable estimate of any liability can be made. Details of these investigations and a discussion of the nature of the associated uncertainties are given in Note 31.
Pension allowances Provisions gains instruments assets Intangibles hedging schemes forward Other Total £m £m £m £m £m £m £m £m £m £m £m £m
Under UK tax rules, tax losses can be carried forward indefinitely.
December 2016 are given credit in future periods at the main rate of UK corporation tax, excluding the Banking Surcharge rate (8%)
December 2016 take into account the reduced rates in respect of tax losses and non-banking temporary differences and where appropriate, the banking surcharge inclusive rate in respect of other banking temporary differences.
reduction in the carrying value of deferred tax assets of £701 million was recorded in 2013, an additional reduction of £850 million was recorded in 2014, with a further reduction of £300 million being recorded in 2016. In addition, deferred tax of £150 million was not recognised in respect of excess 2013 UK taxable losses. RBS expects that the balance of recognised deferred tax asset at 31 December 2016 of £182 million in respect of tax losses amounting to £947 million will be recovered by the end of
Ulster Bank Ireland DAC – A deferred tax asset of £249 million has been recognised in respect of losses of £1,992 million (2015 - £1,678 million; 2014 - £1,776 million) of total tax losses of carried forward at 31 December 2015. Please note that the increase in the total tax losses and associated deferred tax asset is due to the €:£ exchange rate. These losses arose principally as a result of significant impairment charges between 2008 and 2013 reflecting challenging economic conditions in the Republic of Ireland. Impairment charges have reduced and Ulster Bank
Deferred tax assets of £7,940 million (2015 - £6,349 million; 2014 - £5,738 million) have not been recognised in respect of tax losses and other temporary differences carried forward of jurisdictions where doubt exists over the availability of future taxable profits. Of these losses and other temporary differences, £5,280 million expire within five years and £10,331 million thereafter. The balance of tax losses and other temporary differences carried forward has no expiry date.
Deferred tax liabilities of £258 million (2015 - £256 million; 2014 - £186 million) have not been recognised in respect of retained earnings of overseas subsidiaries and held-over gains on the incorporation of overseas branches. Retained earnings of overseas subsidiaries are expected to be reinvested indefinitely or remitted to the UK free from further taxation. No taxation is expected to arise in the foreseeable future in respect of held-over gains. Changes to UK tax legislation largely exempts from UK
Currently 2017 2018 2019-2021 2022-2026 Thereafter Perpetual Total 2016 - call date £m £m £m £m £m £m £m £m 2015 - final redemption £m £m £m £m £m £m £m
Currently 2016 2017 2018-2020 2021-2025 Thereafter Perpetual Total 2015 - call date £m £m £m £m £m £m £m £m
Issuances and Redemptions during the year (values as at date of transaction) are set out below.
The Royal Bank of Scotland plc £54 million 5.13% undated notes Ineligible 55 —
Notes: (1) 61.4 million shares with a total nominal value of £0.3 million were redeemed in September 2016 (2015 – 75.8 million shares with a nominal value of £0.5 million were redeemed). (2) The entire holding of B shares was converted into ordinary shares in October 2015.
During 2016, the company allotted and issued the following new ordinary shares of £1 each: Month Number of shares
From December 2009, HM Treasury owned 51 billion B shares with a nominal value of £0.01 each and a dividend access share
In March 2016, a final payment of £1,193 million was made to
HM Treasury to retire the DAS. The terms for the removal of the
Retirement Agreement, upon the final payment, the DAS lost its preferential rights and become a single B share, which was subsequently cancelled.
Board has decided a further £300 million of new equity will be issued during the course of 2017 to again partially neutralise the
(3) Preferred securities in issue - €166 million RBS Capital Trust C, fixed/floating rate non-cumulative trust preferred securities. Notice of redemption issued in May 2016 and settlement was in July 2016.
(5) The coupons on these notes are non-cumulative and payable at the company’s discretion. In the event the Group’s CET1 ratio falls below 7% any outstanding notes will be converted into ordinary shares at a fixed price. While taking the legal form of debt these notes are classified as equity under IFRS.
(7) Issued in August 2016. In the event of conversion, converted into ordinary shares at a price of $2.284 nominal per £1 share.
Merger reserve - the merger reserve comprises the premium on shares issued to acquire NatWest, less goodwill amortisation charged under previous GAAP, and the premium arising on shares issued to acquire Aonach Mor Limited, less amounts realised through subsequent share redemptions by Aonach Mor
Own shares held - at 31 December 2016, 39 million ordinary shares of £1 each of the company (2015 - 26 million; 2014 - 28 million) were held by employee share trusts in respect of share awards and options granted to employees. During the year, the employee share trusts purchased 29 million ordinary shares and delivered 16 million ordinary shares in satisfaction of the exercise of options and the vesting of share awards under the employee share plans.
Finance lease contracts and hire purchase agreements Operating lease assets: Gross Present value Other Future Present future minimum amounts adjustments movements drawdowns value lease rentals £m £m £m £m £m £m
Year in which residual value will be recovered Year in which residual value will be recovered
Within 1 but within but within After 5 Within 1 but within but within After 5 year 2 years 5 years years year 2 years 5 years years £m £m £m £m £m £m £m £m £m £m
Acting as a lessor, RBS provides asset finance to its customers. It purchases plant, equipment and intellectual property, renting them to customers under lease arrangements that, depending on their terms, qualify as either operating or finance leases.
A structured entity (SE) is an entity that has been designed such that voting or similar rights are not the dominant factor in deciding who controls the entity, for example, when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements. SEs are usually established for a specific, limited purpose. They do not carry out a business or trade and typically have no employees. They take a variety of legal forms - trusts, partnerships and companies - and fulfil many different functions. As well as being a key element of securitisations, SEs are also used in fund management activities in order to segregate custodial duties from the provision of fund management advice.
arranges securitisations to facilitate client transactions and undertakes own asset securitisations to sell or to fund portfolios of financial assets. RBS also acts as an underwriter and depositor in securitisation transactions in both client and proprietary transactions.
Income arising from sponsored entities where we hold net interest at year end was £18 million (2015 - £39 million).
Generally, the agreements require additional collateral to be provided if the value of the securities falls below a predetermined level. Under standard terms for repurchase transactions in the
Qualifying instruments and related share premium subject to phase out 5,416 5,092
Qualifying instruments issued by subsidiaries and held by third parties 339 1,627
It is RBS’s policy to maintain a strong capital base, to expand it as appropriate and to utilise it efficiently throughout its activities to optimise the return to shareholders while maintaining a prudent relationship between the capital base and the underlying risks of the business. In carrying out this policy, RBS has regard to the supervisory requirements of the PRA. The PRA uses capital ratios as a measure of capital adequacy in the UK banking sector, comparing a bank's capital resources with its riskweighted assets (the assets and off-balance sheet exposures are
A number of subsidiaries and sub-groups within RBS, principally banking entities, are subject to various individual regulatory capital requirements in the UK and overseas. Furthermore, the payment of dividends by subsidiaries and the ability of members of RBS to lend money to other members of RBS may be subject to restrictions such as local regulatory or legal requirements, the availability of reserves and financial and operating performance.
Guarantees and assets pledged as collateral security 1,819 610 560 4,878 7,867 9,036
Standby facilities, credit lines and other commitments 67,421 21,478 43,101 6,645 138,645 137,714
Banking commitments and contingent obligations, which have been entered into on behalf of customers and for which there are corresponding obligations from customers, are not included in assets and liabilities. RBS's maximum exposure to credit loss, in the event of its obligation crystallising and all counterclaims, collateral or security proving valueless, is represented by the contractual nominal amount of these instruments included in the table above. These commitments and contingent obligations are subject to RBS's normal credit approval processes.
could be required to pay under a guarantee is its principal amount as in the table above. RBS expects most guarantees to expire unused.
Notes: (1) Predominantly property leases. (2) Of which due within 1 year: £231 million (2015 - £302 million).
The FSCS has borrowed from HM Treasury to fund compensation costs associated with the failure of Bradford &
LIBOR plus 111 basis points or the relevant gilt rate for the equivalent cost of borrowing from HMT. The FSCS and HM
& Bingley. In addition, the FSCS levied an interim payment relating to resolution costs for Dunfermline Building Society of £325 million in 2015, no further levy is expected in relation to this matter. The total interest element levied on the industry in the 2016/17 scheme year was £337 million (£353 million in the 2015/16 scheme year).
Matters when it is probable that an outflow of economic benefits will be required to settle an obligation resulting from past events, and a reliable estimate can be made of the amount of the obligation. While the outcome of these Matters is inherently uncertain, the directors believe that, based on the information available to them, appropriate provisions have been made in respect of the Matters as at 31 December 2016 (see Note 20).
RBS expects that in future periods additional provisions, settlement amounts, and customer redress payments will be necessary, in amounts that are expected to be substantial in some instances.
Court of Justice of England and Wales by sets of current and former shareholders, against RBSG (and in one of those claims, also against certain former individual officers and directors)
December 2013. Since then, further High Court claims have been issued against RBS under the Group Litigation Order which is now closed to further claimants. Prior to the partial settlement described below, the aggregate value of the shares subscribed for at 200 pence per share by all of the then claimant shareholders was approximately £4 billion.
In December 2016 RBS concluded full and final settlements with four of the five shareholder groups representing 78% of the claims by value. The maximum settlement figure of £800 million is covered by existing RBS provisions and that total figure assumes that agreement is reached with all groups, is split proportionally between each, and is subject to validation of claims.
Should the remaining group’s claim not be settled, RBS will continue to defend it. Damages have not yet been quantified. The court timetable provides that a trial of the preliminary issue of whether the rights issue prospectus contained untrue and misleading statements and/or improper omissions will commence in May 2017. In the event that the court makes such a finding, further trial(s) will be required to consider whether any such statements and/or omissions caused loss and, if so, the quantum of that loss.
(including those claims specifically described in this note) involve the issuance of approximately US$36.5 billion of RMBS issued primarily from 2005 to 2007.
RBS companies remain as defendants in more than 10 lawsuits brought by or on behalf of purchasers of RMBS, including the purported class action identified below.
In the event of an adverse judgment in any of these cases, the amount of RBS’s liability will depend on numerous factors that are relevant to the calculation of damages, which may include the recognised loss of principal value in the securities at the time of judgment (write-downs); the value of the remaining unpaid principal balance of the securities at the time the case began, at the time of judgment (if the plaintiff still owns the securities at the time of judgment), or at the time when the plaintiff disposed of the securities (if plaintiff sold the securities); and a calculation of pre and post judgment interest that the plaintiff could be awarded, which could be a material amount.
United States District Court for the District of Connecticut, and it relates to approximately US$32 billion of RMBS for which RBS
entities acted as sponsor/depositor and/or lead underwriter or colead underwriter. Of the US$32 billion, approximately US$7.6 billion was outstanding at 31 December 2016 with cumulative write downs to date on the securities of approximately US$1.1 billion (being the recognised loss of principal value suffered by security holders). In September 2013, the Court denied the defendants’ motion to dismiss FHFA’s amended complaint in this case. The matter continues in the discovery phase.
Securities Inc. pursuant to the judgment, plus the costs and attorney’s fees that will be due to FHFA if the judgment is upheld.
As at 31 December 2016, the total aggregate of provisions in relation to certain of the RMBS litigation matters (described immediately above) and RMBS and other securitised products investigations (set out under “Investigations and reviews” on page 373), including an additional provision of £3.4 billion ($4.2 billion) in 2016, is £6.8 billion ($8.3 billion). The duration and outcome of these investigations and litigation matters remain uncertain, including in respect of whether settlements for all or any of such matters may be reached.
In many of the securitisation and securities related cases in the
LIBOR and prices of LIBOR-based derivatives in various markets through various means.
Most of the USD LIBOR-related actions in which RBS companies are defendants, including all purported class actions relating to
In a decision issued on 20 December 2016, the district court held that it lacks personal jurisdiction over RBS with respect to certain claims asserted in the coordinated proceeding. Following that decision, RBS is dismissed from each of the USD LIBOR-related class actions in the coordinated proceeding, subject to appeal, although certain non-class cases on behalf of particular plaintiffs remain pending.
the Australian Bank Bill Swap Reference Rate, all of which are pending before other judges in the United States District Court for the Southern District of New York. Each of these matters is subject to motions to dismiss that will be made or are currently pending, with the exceptions that on 28 March 2014, the Court in the action relating to Euroyen TIBOR futures contracts dismissed the plaintiffs’ antitrust claims, but declined to dismiss their claims under the Commodity Exchange Act for price manipulation and on 21 February 2017, the court in the action relating to Euribor dismissed all claims alleged against RBS for lack of personal jurisdiction.
United States District Court for the Southern District of New York alleging manipulation of USD ISDAFIX rates In 2015, RBS plc reached an agreement to settle this matter for US$50 million, and that settlement received preliminary approval from the Court on 11 May 2016. The settlement amount has been paid into escrow pending the final court approval of the settlement.
FX instruments. Following the Court’s preliminary approval of the settlement on 15 December 2015, RBS paid the total settlement amount (US$255 million) into escrow pending final court approval of the settlement. On 8 June 2016, the Court denied a motion by the settling defendants to enjoin a second FX-related antitrust class action pending in the same court from proceeding, holding that the alleged class of “consumers and end-user businesses” in that action is not included within the classes at issue in the consolidated action. RBS has made a motion to dismiss the claims in this “consumer” action, and that motion remains pending.
September 2016 on the ground that the plaintiffs failed to plead that the defendants had ERISA-based fiduciary duties to the plaintiffs. Plaintiffs have commenced an appeal of this dismissal.
instruments. The complaint defines “indirect purchasers” as persons who were indirectly affected by FX instruments that others entered into directly with defendant banks or on exchanges. It is alleged that certain RBS companies and other defendant banks caused damages to the “indirect purchasers” by conspiring to restrain trade in the FX spot market. The complaint seeks damages and other relief under federal, California, and
31 Memorandum items continued In September 2015, certain members of the Group, as well as a number of other financial institutions, were named as defendants in two purported class actions filed in Ontario and Quebec on behalf of persons in Canada who entered into foreign exchange transactions or who invested in funds that entered into foreign exchange transactions. The plaintiffs allege that the defendants violated the Canadian Competition Act by conspiring to manipulate the prices of currency trades. In January 2017, RBS
reached an agreement in principle to settle these matters for approximately CAD 13 million, subject to settlement documentation and court approval.
RBS cannot predict whether any of these claims will be pursued, but expects that several may.
Securities Inc. The complaints allege that the defendants rigged the US Treasury securities auction bidding process to deflate prices at which they bought such securities and colluded to increase the prices at which they sold such securities to plaintiffs.
The complaints assert claims under the US antitrust laws and the
Beginning in November 2015, RBS plc and other members of the
Court for the Northern District of Illinois. The complaints, filed on behalf of persons who entered into interest rate swaps with the defendants, allege that the defendants violated the US antitrust laws by restraining competition in the market for interest rate swaps through various means and thereby caused inflated bidask spreads for interest rate swaps, to the alleged detriment of the plaintiff class.
RBS has made a motion to dismiss the operative complaints in these matters.
Securities LLC., filed a clawback claim against The Royal Bank of
RBS Securities Inc. and certain other RBS companies, as well as several other financial institutions, are defendants in an adversary proceeding filed in the US bankruptcy court in
Netherlands and Australia, relating to the sale of a type of structured financial product known as a constant proportion debt obligation (CPDO). The claims in England and the Netherlands have been settled. The remaining claim in Australia has been settled subject to judicial approval.
made misrepresentations in relation to LIBOR. Claims have been brought by customers who were considered under the UK
In addition to claims alleging that IRHPs were mis-sold, RBS has received a number of claims involving allegations that it breached a legal duty of care in its conduct of the FCA redress programme.
FCA review. The customer has been granted leave to appeal by the Court of Appeal, and the appeal is scheduled for May 2017.
“Tax Dispute”). Separately, RBS is a named defendant in proceedings before the High Court brought in 2015 by ten companies (all in liquidation) (the “Liquidated Companies”)
On 28 March 2013, the trial court (the United States District Court for the Eastern District of New York) granted summary judgment in favour of NatWest on the issue of scienter, but on 22
September 2014, that summary judgment ruling was vacated by the United States Court of Appeals for the Second Circuit. The appeals court returned the case to the trial court for consideration of NatWest's other asserted grounds for summary judgment and, if necessary, for trial. On 31 March 2016, the trial court denied a motion by NatWest to dismiss the case in which NatWest had argued that the court lacked personal jurisdiction over NatWest.
NatWest has since asserted other grounds for summary judgment that the trial court has not previously ruled upon.
York in November 2014 by a number of US nationals (or their estates, survivors, or heirs), most of whom are or were US
military personnel, who were killed or injured in more than 90 attacks in Iraq between 2004 and 2011.
On 2 November 2016, additional plaintiffs filed a second complaint in the United States District Court for the Southern
The allegations in the complaint are substantially similar to the allegations contained in the complaint described above.
and elsewhere, on an ongoing and regular basis, and in response to informal and formal inquiries or investigations, regarding operational, systems and control evaluations and issues including those related to compliance with applicable laws and regulations, including consumer protection, business conduct, competition/anti-trust, anti-bribery, anti-money laundering and sanctions regimes.
The NatWest Markets (formerly CIB) segment in particular has been providing information regarding a variety of matters, including, for example, the setting of benchmark rates and related derivatives trading, conduct in the foreign exchange market, and various issues relating to the issuance, underwriting, and sales and trading of fixed-income securities, including structured products and government securities.
Any matters discussed or identified during such discussions and inquiries may result in, among other things, further inquiry or investigation, other action being taken by governmental and regulatory authorities, increased costs being incurred by RBS, remediation of systems and controls, public or private censure, restriction of RBS’s business activities and/or fines. Any of the events or circumstances mentioned in this paragraph or below could have a material adverse effect on RBS, its business, authorisations and licences, reputation, results of operations or the price of securities issued by it.
In the US, RBS is involved in reviews, investigations and proceedings (both formal and informal) by federal and state governmental law enforcement and other agencies and selfregulatory organisations, including the US Department of Justice
Financial Fraud Enforcement Task Force (including several state attorneys general, including those mentioned below), relating to, among other things, issuance, underwriting and trading in RMBS
These ongoing matters include, among others, active civil and criminal investigations by the DOJ, relating primarily to due diligence on and disclosure related to loans purchased for, or otherwise included in, securitisations and related disclosures.
In June 2016, RBS Securities Inc. (RBSSI), a U.S. broker-dealer, reached an agreement in principle to resolve investigations by the office of the Attorney General of Connecticut on behalf of the
Connecticut Department of Banking, concerning RBSSI’s underwriting and issuance of RMBS and the potential consequences to RBSSI of RBS plc’s May 2015 FX-related guilty plea. The agreement became final on 3 October 2016 through the publication by the Department of Banking of two agreed consent orders without RBSSI admitting or denying the
31 Memorandum items continued As required by the RMBS consent order, in addition to making certain undertakings, RBSSI has paid US$120 million to the State of Connecticut to resolve the investigation. The amount was covered by a provision that had previously been established.
Pursuant to the FX consent order, RBSSI agreed, among other things, to certify to the Department of Banking its compliance with various obligations undertaken in connection with RBS plc's FXrelated guilty plea and FX-related resolutions with the Commodity
In May 2011, the New York State Attorney General requested additional information about RBS’s mortgage securitisation business and, following the formation of the RMBS Working
Group, has focused on the same or similar issues as the other state and federal RMBS Working Group investigations described above. The investigation is ongoing.
RBSSI has also been responding to an ongoing criminal investigation by the United States Attorney for the District of
Connecticut relating to alleged misrepresentations in the trading of various forms of asset-backed securities, including RMBS, commercial mortgage-backed securities, CDOs, and CLOs. In
March and December 2015, two former RBSSI traders entered guilty pleas in the United States District Court for the District of
Connecticut, each to one count of conspiracy to commit securities fraud while employed at RBSSI. RBSSI is in advanced discussions to resolve the matter.
RBS’s NatWest Markets business in North America was a purchaser of non-agency residential mortgages in the secondary market, and an issuer and underwriter of non-agency RMBS.
Futures Trading Commission (CFTC) and the DOJ in relation to investigations into submissions, communications and procedures around the setting of LIBOR. RBS agreed to pay penalties of £87.5 million, US$325 million and US$150 million to these authorities respectively to resolve the investigations and also agreed to certain undertakings in its settlement with the CFTC.
competition infringements and EURIBOR competition infringements respectively. This matter is now concluded.
In December 2016 the Swiss ComCo announced the closure of four separate investigations into RBS and certain other banks relating to interest rate derivatives and LIBOR. RBS received full immunity for fines relating to the Swiss franc LIBOR benchmark investigation. RBS has agreed to pay a total of CHF17.06m in fines to settle the other investigations.
RBS is co-operating with investigations and requests for information by various other governmental and regulatory authorities, including in the UK, US and Asia, into its submissions, communications and procedures relating to a number of trading rates, including LIBOR and other interest rate settings, and non-deliverable forwards.
and the CFTC in relation to investigations into failings in RBSG’s
The charged conspiracy occurred between as early as December 2007 to at least April 2010. On 5 January 2017, the United States
District Court for the District of Connecticut imposed a sentence on RBS plc consisting of the US$395 million criminal fine previously agreed with the DOJ and a term of probation, which among other things, prohibits RBS plc from committing another crime in violation of US law or engaging in the FX trading practices that form the basis for the charged crime and requires
activities and certain other designated market activities, including the creation of an enhanced written internal controls and compliance program, an improved compliance risk management program, and an enhanced internal audit program. RBS plc and
RBS Securities Inc. are obligated to implement and comply with these programs as approved by the Federal Reserve, and are also required to conduct, on an annual basis, a review of applicable compliance policies and procedures and a riskfocused sampling of key controls.
RBS is co-operating with investigations and responding to inquiries from other governmental and regulatory (including competition) authorities on similar issues relating to failings in its
On 21 July 2014, the Serious Fraud Office in the UK (SFO)
announced that it was launching a criminal investigation into allegations of fraudulent conduct in the foreign exchange market, apparently involving multiple financial institutions. On 15 March 2016, the SFO announced that it was closing its investigation, having concluded that, based on the information and material obtained, there was insufficient evidence for a realistic prospect of conviction.
31 Memorandum items continued Interest rate hedging products (IRHP) redress programme
RBS provisions in relation to the above redress exercises total £1.5 billion to date for these matters, of which £1.4 billion had been utilised at 31 December 2016.
RBS has been named as an interested party in a number of claims for judicial review of KPMG’s decisions as Skilled Person in RBS’s previously disclosed IRHP redress programme. This follows a similar claim from a customer of another UK bank, also against KPMG.
KPMG is not a body amenable to judicial review in respect of its role as Skilled Person in this matter; and (2) that there was no unfairness by the other bank in the procedure adopted. The claimant has sought permission to appeal the decision.
The majority of the claims that name RBS as an interested party have been discontinued but there are still several cases which remain stayed pending the outcome of any appeal in the other bank’s case. If permission to appeal is granted and the appeal court finds that a section 166-appointed Skilled Person is susceptible to judicial review, these remaining claims against