REG - Royal Bk Scot.Grp. - Annual Financial Report <Origin Href="QuoteRef">RBS.L</Origin> - Part 4

NatwestAnnouncement

23/02/2018 07:05

- Part 4: For the preceding part double click  ID:nRSW7514Fc 

introduced by the
Banking Reform Act 2013. The implementation of these reforms may result in the
consolidation of newly separated businesses or assets of certain financial
institutions with those of other parties to realise new synergies or protect
their competitive position and is likely to increase competitive pressures on
the Group. 
 
The UK retail banking sector has been subjected to intense scrutiny by the UK
competition authorities and by other bodies, including the FCA, in recent
years, including with a number of reviews/inquiries being carried out,
including market reviews conducted by the CMA and its predecessor the Office
of Fair Trading regarding SME banking and personal banking products and
services, the Independent Commission on Banking and the Parliamentary
Commission on Banking Standards. 
 
These reviews raised significant concerns about the effectiveness of
competition in the retail banking sector. The CMA's Retail Banking Market
Investigation report sets out measures primarily intended to make it easier
for consumers and businesses to compare PCA and SME bank products, increase
the transparency of price comparison between banks and amend PCA overdraft
charging. The CMA is working with HM Treasury and other regulators to
implement these remedies which are likely to impose additional compliance
requirements on the Group and could, in aggregate, adversely impact the
Group's competitive position, product offering and revenues. 
 
Adverse findings resulting from current or future competition investigations
may result in the imposition of reforms or remedies which may impact the
competitive landscape in which the Group operates or result in restrictions on
mergers and consolidations within the UK financial sector. 
 
The impact of any such developments in the UK will become more significant as
the Group's business becomes increasingly concentrated in the UK retail
sector. These and other changes to the competitive framework in which the
Group operates could have a material adverse effect on the Group's business,
margins, profitability, financial condition and prospects. 
 
The Group and its subsidiaries are subject to an evolving framework on
recovery and resolution, the impact of which remains uncertain, and which may
result in additional compliance challenges and costs. 
 
In the EU, the UK and the US, regulators have implemented or are in the
process of implementing recovery and resolution regimes designed to prevent
the failure of financial institutions and resolution tools to ensure the
timely and orderly resolution of financial institutions without use of public
funds. 
 
These initiatives have been complemented by a broader set of initiatives to
improve the resilience of financial institutions and reduce systemic risk,
including the UK ring-fencing regime, the introduction of certain prudential
requirements and powers under CRD IV, and certain other measures introduced
under the BRRD, including the requirements relating to loss absorbing
capital. 
 
The BRRD, which was implemented in the UK from January 2015, provides a
framework for the recovery and resolution of credit institutions and
investment firms, their subsidiaries and certain holding companies in the EU,
and the tools and powers introduced under the BRRD include preparatory and
preventive measures, early supervisory intervention powers and resolution
tools. 
 
Implementation of certain provisions of the BRRD remains subject to secondary
rulemaking as well as a review by the European Parliament and the European
Commission of certain topics mandated by the BRRD. In November 2016, as a
result of this review, the European Commission published a package of
proposals seeking to introduce certain amendments to CRD IV and the BRRD.
These proposals are now subject to further discussions and negotiations among
the European institutions and it is not possible to anticipate their final
content. Further amendments to the BRRD or the implementing rules in the EU or
the UK may also be necessary to ensure continued consistency with the FSB
recommendations on key attributes of national resolution regimes and
resolution planning for G-SIBs, including with respect to TLAC and MREL
requirements. 
 
In light of these potential developments as well as the impact of Brexit,
there remains uncertainty as to the rules which may apply to the Group going
forward. In addition, banks headquartered in countries which are members of
the Eurozone are now subject to the European banking union framework. 
 
Risk factors continued 
 
In November 2014, the ECB assumed direct supervisory responsibility for RBS
N.V. and Ulster Bank Ireland DAC under the Single Supervisory Mechanism (SSM).
As a result of the above, there remains uncertainty as to how the relevant
resolution regimes in force in the UK, the Eurozone and other jurisdictions,
would interact in the event of a resolution of the Group, although it remains
clear that the Bank of England, as UK resolution authority, would be
responsible for resolution of the Group overall (consistent with the Group's
single point of entry bail-in resolution strategy, as determined by the Bank
of England) 
 
The BRRD requires national resolution funds to raise 'ex ante' contributions
on banks and investment firms in proportion to their liabilities and risk
profiles and allow them to raise additional 'ex post' funding contributions in
the event the ex-ante contributions do not cover the losses, costs or other
expenses incurred by use of the resolution fund. Although receipts from the UK
bank levy are currently being used to meet the ex-ante and ex post funding
requirements, the Group may be required to make additional contributions in
the future. In addition, Group entities in countries subject to the European
banking union are required to pay supervisory fees towards the funding of the
SSM as well as contributions to the single resolution fund. 
 
The recovery and resolution regime implementing the BRRD in the UK places
compliance and reporting obligations on the Group.  These compliance and
reporting obligations may result in increased costs, including as a result of
the Group's mandatory participation in resolution funds, and heightened
compliance risks and the Group may not be in a position to comply with all
such requirements within the prescribed deadlines or at all.  In addition to
the costs associated with the issuance of MREL-eligible debt securities and
compliance with internal MREL requirements, further changes may be required
for the Group to enhance its resolvability, in particular due to regulatory
requirements relating to operational continuity and valuations capabilities in
resolution. 
 
In July 2016, the PRA adopted a new framework requiring financial institutions
to ensure the continuity of critical shared services (provided by entities
within the group or external providers) to facilitate recovery action, orderly
resolution and post-resolution restructuring, which will apply from 1 January
2019. 
 
The application of such rules to the Group requires the Group to restructure
certain of its activities relating to the provision of services from one legal
entity to another within the Group, may limit the Group's ability to outsource
certain functions and will result in increased costs resulting from the
requirement to ensure the financial and operational resilience and independent
governance of such critical services. 
 
In August 2017, the Bank of England published a consultation paper setting out
its preliminary views on the valuation capabilities that firms should have in
place prior to resolution. The Bank of England has not yet published a final
statement of policy in this area. 
 
Achieving compliance with the expectations set out in any such statement of
policy, once finalised, may require changes to the Group's existing valuation
processes and/or the development of additional capabilities, infrastructure
and processes.  The Group may incur costs in complying with such obligations,
which costs may increase if the Bank of England determined that the Group's
valuation capabilities constitute an impediment to resolution and subsequently
exercised its statutory power to direct the Group to take measures to address
such impediment. 
 
In addition, compliance by the Group with this recovery and resolution
framework has required and is expected to continue to require significant work
and engagement with the Group's regulators, including in order for the Group
to continue to submit to the PRA an annual recovery plan assessed as meeting
regulatory requirements and to be assessed as resolvable by the Bank of
England.  The outcome of this regulatory dialogue may impact the Group's
operations or structure or otherwise result in increased costs, including as a
result of the Bank of England's power under section 3A of the Banking Act to
direct institutions to address impediments to resolvability. 
 
The Group may become subject to the application of stabilisation or resolution
powers in certain significant stress situations, which may result in various
actions being taken in relation to the Group and any securities of the Group,
including the write-off, write-down or conversion of the Group's securities. 
 
The Banking Act 2009, as amended to implement the BRRD ('Banking Act') confers
substantial powers on relevant UK authorities designed to enable them to take
a range of actions in relation to UK banks or investment firms and certain of
their affiliates in the event a bank or investment firm in the same group is
considered to be failing or likely to fail. Under the Banking Act, wide powers
are granted to the Bank of England (as the relevant resolution authority), as
appropriate as part of a special resolution regime (the 'SRR'). These powers
enable the Bank of England to implement resolution measures with respect to a
UK bank or investment firm and certain of its affiliates (including, for
example, RBSG) (each a 'relevant entity') in circumstances in which the
relevant UK resolution authorities are satisfied that the resolution
conditions are met. Under the applicable regulatory framework and pursuant to
guidance issued by the Bank of England, governmental financial support, if any
is provided, would only be used as a last resort measure where a serious
threat to financial stability cannot be avoided by other measures (such as the
stabilisation options described below, including the UK bail-in power) and
subject to the limitations set out in the Banking Act. 
 
Several stabilisation options and tools are available to the Bank of England
under the SRR, where a resolution has been triggered. In addition, the Bank of
England may commence special administration or liquidation procedures
specifically applicable to banks. Where stabilisation options are used which
rely on the use of public funds, such funds can only be used once there has
been a contribution to loss absorption and recapitalisation of at least 8% of
the total liabilities of the institution under resolution. The Bank of England
has indicated that among these options, the UK bail-in tool (as described
further below) would apply in the event that a resolution of the Group were
triggered.

Risk factors continued 
 
Further, the Banking Act grants broad powers to the Bank of England, the
application of which may adversely affect contractual arrangements and which
include the ability to (i) modify or cancel contractual arrangements to which
an entity in resolution is party, in certain circumstances; (ii) suspend or
override the enforcement provisions or termination rights that might be
invoked by counterparties facing an entity in resolution, as a result of the
exercise of the resolution powers; and (iii) disapply or modify laws in the UK
(with possible retrospective effect) to enable the powers under the Banking
Act to be used effectively. 
 
The stabilisation options are intended to be applied prior to the point at
which any insolvency proceedings with respect to the relevant entity would
otherwise have been initiated. Accordingly, the stabilisation options may be
exercised if the relevant UK resolution authority: (i) is satisfied that a UK
bank or investment firm is failing, or is likely to fail; (ii) determines that
it is not reasonably likely that (ignoring the stabilisation powers) action
will be taken by or in respect of a UK bank or investment firm that will
result in condition (i) above ceasing to be met; (iii) considers the exercise
of the stabilisation powers to be necessary, having regard to certain public
interest considerations (such as the stability of the UK financial system,
public confidence in the UK banking system and the protection of depositors,
being some of the special resolution objectives) and (iv) considers that the
special resolution objectives would not be met to the same extent by the
winding-up of the UK bank or investment firm. 
 
In the event that the Bank of England seeks to exercise its powers in relation
to a UK banking group company (such as RBSG), the relevant UK resolution
authority has to be satisfied that (A) the conditions set out in (i) to (iv)
above are met in respect of a UK bank or investment firm in the same banking
group (or, in respect of an EEA or third country credit institution or
investment firm in the same banking group, the relevant EEA or third country
resolution authority is satisfied that the conditions for resolution
applicable in its jurisdiction are met) and (B) certain criteria are met, such
as the exercise of the powers in relation to such UK banking group company
being necessary having regard to public interest considerations. The use of
different stabilisation powers is also subject to further 'specific
conditions' that vary according to the relevant stabilisation power being
used. Although the SRR sets out the pre-conditions for determining whether an
institution is failing or likely to fail, it is uncertain how the relevant UK
resolution authority would assess such conditions in any particular
pre-insolvency scenario affecting RBSG and/or other members of the Group and
in deciding whether to exercise a resolution power.  There has been no
application of the SRR powers in the UK to a large financial institution, such
as RBSG, to date, which could provide an indication of the relevant UK
resolution authority's approach to the exercise of the resolution powers, and
even if such examples existed, they may not be indicative of how such powers
would be applied to RBSG. Therefore, holders of shares and other securities
issued by the Group may not be able to anticipate a potential exercise of any
such powers. 
 
The UK bail-in tool is one of the powers available to the Bank of England
under the SRR and was introduced under the Banking Reform Act 2013. The UK
government amended the provisions of the Banking Act to ensure the consistency
of these provisions with the bail-in provisions under the BRRD, which
amendments came into effect on 1 January 2015. The UK bail-in tool includes
both a power to write-down or convert capital instruments and triggered at the
point of non-viability of a financial institution and a bail-in tool
applicable to eligible liabilities (including senior unsecured debt securities
issued by the Group) and available in resolution. 
 
The capital instruments write-down and conversion power may be exercised
independently of, or in combination with, the exercise of a resolution tool,
and it allows resolution authorities to cancel all or a portion of the
principal amount of capital instruments and/or convert such capital
instruments into common equity Tier 1 instruments when an institution is no
longer viable. The point of non-viability for such purposes is the point at
which the Bank of England or the PRA determines that the institution meets
certain conditions under the Banking Act, for example if the institution will
no longer be viable unless the relevant capital instruments are written down
or extraordinary public support is provided, and without such support the
appropriate authority determines that the institution would no longer be
viable.  The Bank of England may exercise the power to write down or convert
capital instruments without any further exercise of resolution tools, as may
be the case where the write-down or conversion of capital instruments is
sufficient to restore an institution to viability. 
 
Where the conditions for resolution exist and it is determined that a
stabilisation power may be exercised, the Bank of England may use the bail-in
tool (in combination with other resolution tools under the Banking Act) to,
among other things, cancel or reduce all or a portion of the principal amount
of, or interest on, certain unsecured liabilities of a failing financial
institution and/or convert certain debt claims into another security,
including ordinary shares of the surviving entity. 
 
In addition, the Bank of England may use the bail-in tool to, among other
things, replace or substitute the issuer as obligor in respect of debt
instruments, modify the terms of debt instruments (including altering the
maturity (if any) and/or the amount of interest payable and/or imposing a
temporary suspension on payments) and discontinue the listing and admission to
trading of financial instruments. The exercise of the bail-in tool will be
determined by the Bank of England which will have discretion to determine
whether the institution has reached a point of non-viabi- Part 4: For the preceding part double click  ID:nRSW7514Fc 

retail banking sector has been subjected to intense scrutiny by the UK
competition authorities and by other bodies, including the FCA, in recent
years, including with a number of reviews/inquiries being carried out,
including market reviews conducted by the CMA and its predecessor the Office
of Fair Trading regarding SME banking and personal banking products and
services, the Independent Commission on Banking and the Parliamentary
Commission on Banking Standards.
 
These reviews raised significant concerns about the effectiveness of
competition in the retail banking sector. The CMA's Retail Banking Market
Investigation report sets out measures primarily intended to make it easier
for consumers and businesses to compare PCA and SME bank products, increase
the transparency of price comparison between banks and amend PCA overdraft
charging. The CMA is working with HM Treasury and other regulators to
implement these remedies which are likely to impose additional compliance
requirements on the Group and could, in aggregate, adversely impact the
Group's competitive position, product offering and revenues.
 
Adverse findings resulting from current or future competition investigations
may result in the imposition of reforms or remedies which may impact the
competitive landscape in which the Group operates or result in restrictions on
mergers and consolidations within the UK financial sector.
 
The impact of any such developments in the UK will become more significant as
the Group's business becomes increasingly concentrated in the UK retail
sector. These and other changes to the competitive framework in which the
Group operates could have a material adverse effect on the Group's business,
margins, profitability, financial condition and prospects.
 
The Group and its subsidiaries are subject to an evolving framework on
recovery and resolution, the impact of which remains uncertain, and which may
result in additional compliance challenges and costs.
In the EU, the UK and the US, regulators have implemented or are in the
process of implementing recovery and resolution regimes designed to prevent
the failure of financial institutions and resolution tools to ensure the
timely and orderly resolution of financial institutions without use of public
funds.
 
These initiatives have been complemented by a broader set of initiatives to
improve the resilience of financial institutions and reduce systemic risk,
including the UK ring-fencing regime, the introduction of certain prudential
requirements and powers under CRD IV, and certain other measures introduced
under the BRRD, including the requirements relating to loss absorbing capital.
 
The BRRD, which was implemented in the UK from January 2015, provides a
framework for the recovery and resolution of credit institutions and
investment firms, their subsidiaries and certain holding companies in the EU,
and the tools and powers introduced under the BRRD include preparatory and
preventive measures, early supervisory intervention powers and resolution
tools.
 
Implementation of certain provisions of the BRRD remains subject to secondary
rulemaking as well as a review by the European Parliament and the European
Commission of certain topics mandated by the BRRD. In November 2016, as a
result of this review, the European Commission published a package of
proposals seeking to introduce certain amendments to CRD IV and the BRRD.
These proposals are now subject to further discussions and negotiations among
the European institutions and it is not possible to anticipate their final
content. Further amendments to the BRRD or the implementing rules in the EU or
the UK may also be necessary to ensure continued consistency with the FSB
recommendations on key attributes of national resolution regimes and
resolution planning for G-SIBs, including with respect to TLAC and MREL
requirements.
 
In light of these potential developments as well as the impact of Brexit,
there remains uncertainty as to the rules which may apply to the Group going
forward. In addition, banks headquartered in countries which are members of
the Eurozone are now subject to the European banking union framework.
Risk factors continued
In November 2014, the ECB assumed direct supervisory responsibility for RBS
N.V. and Ulster Bank Ireland DAC under the Single Supervisory Mechanism (SSM).
As a result of the above, there remains uncertainty as to how the relevant
resolution regimes in force in the UK, the Eurozone and other jurisdictions,
would interact in the event of a resolution of the Group, although it remains
clear that the Bank of England, as UK resolution authority, would be
responsible for resolution of the Group overall (consistent with the Group's
single point of entry bail-in resolution strategy, as determined by the Bank
of England)
 
The BRRD requires national resolution funds to raise 'ex ante' contributions
on banks and investment firms in proportion to their liabilities and risk
profiles and allow them to raise additional 'ex post' funding contributions in
the event the ex-ante contributions do not cover the losses, costs or other
expenses incurred by use of the resolution fund. Although receipts from the UK
bank levy are currently being used to meet the ex-ante and ex post funding
requirements, the Group may be required to make additional contributions in
the future. In addition, Group entities in countries subject to the European
banking union are required to pay supervisory fees towards the funding of the
SSM as well as contributions to the single resolution fund.
 
The recovery and resolution regime implementing the BRRD in the UK places
compliance and reporting obligations on the Group.  These compliance and
reporting obligations may result in increased costs, including as a result of
the Group's mandatory participation in resolution funds, and heightened
compliance risks and the Group may not be in a position to comply with all
such requirements within the prescribed deadlines or at all.  In addition to
the costs associated with the issuance of MREL-eligible debt securities and
compliance with internal MREL requirements, further changes may be required
for the Group to enhance its resolvability, in particular due to regulatory
requirements relating to operational continuity and valuations capabilities in
resolution.
 
In July 2016, the PRA adopted a new framework requiring financial institutions
to ensure the continuity of critical shared services (provided by entities
within the group or external providers) to facilitate recovery action, orderly
resolution and post-resolution restructuring, which will apply from 1 January
2019.
 
The application of such rules to the Group requires the Group to restructure
certain of its activities relating to the provision of services from one legal
entity to another within the Group, may limit the Group's ability to outsource
certain functions and will result in increased costs resulting from the
requirement to ensure the financial and operational resilience and independent
governance of such critical services.
 
In August 2017, the Bank of England published a consultation paper setting out
its preliminary views on the valuation capabilities that firms should have in
place prior to resolution. The Bank of England has not yet published a final
statement of policy in this area.
 
Achieving compliance with the expectations set out in any such statement of
policy, once finalised, may require changes to the Group's existing valuation
processes and/or the development of additional capabilities, infrastructure
and processes.  The Group may incur costs in complying with such obligations,
which costs may increase if the Bank of England determined that the Group's
valuation capabilities constitute an impediment to resolution and subsequently
exercised its statutory power to direct the Group to take measures to address
such impediment.
 
In addition, compliance by the Group with this recovery and resolution
framework has required and is expected to continue to require significant work
and engagement with the Group's regulators, including in order for the Group
to continue to submit to the PRA an annual recovery plan assessed as meeting
regulatory requirements and to be assessed as resolvable by the Bank of
England.  The outcome of this regulatory dialogue may impact the Group's
operations or structure or otherwise result in increased costs, including as a
result of the Bank of England's power under section 3A of the Banking Act to
direct institutions to address impediments to resolvability.
 
The Group may become subject to the application of stabilisation or resolution
powers in certain significant stress situations, which may result in various
actions being taken in relation to the Group and any securities of the Group,
including the write-off, write-down or conversion of the Group's securities.
The Banking Act 2009, as amended to implement the BRRD ('Banking Act') confers
substantial powers on relevant UK authorities designed to enable them to take
a range of actions in relation to UK banks or investment firms and certain of
their affiliates in the event a bank or investment firm in the same group is
considered to be failing or likely to fail. Under the Banking Act, wide powers
are granted to the Bank of England (as the relevant resolution authority), as
appropriate as part of a special resolution regime (the 'SRR'). These powers
enable the Bank of England to implement resolution measures with respect to a
UK bank or investment firm and certain of its affiliates (including, for
example, RBSG) (each a 'relevant entity') in circumstances in which the
relevant UK resolution authorities are satisfied that the resolution
conditions are met. Under the applicable regulatory framework and pursuant to
guidance issued by the Bank of England, governmental financial support, if any
is provided, would only be used as a last resort measure where a serious
threat to financial stability cannot be avoided by other measures (such as the
stabilisation options described below, including the UK bail-in power) and
subject to the limitations set out in the Banking Act.
 
Several stabilisation options and tools are available to the Bank of England
under the SRR, where a resolution has been triggered. In addition, the Bank of
England may commence special administration or liquidation procedures
specifically applicable to banks. Where stabilisation options are used which
rely on the use of public funds, such funds can only be used once there has
been a contribution to loss absorption and recapitalisation of at least 8% of
the total liabilities of the institution under resolution. The Bank of England
has indicated that among these options, the UK bail-in tool (as described
further below) would apply in the event that a resolution of the Group were
triggered. Risk factors continued
Further, the Banking Act grants broad powers to the Bank of England, the
application of which may adversely affect contractual arrangements and which
include the ability to (i) modify or cancel contractual arrangements to which
an entity in resolution is party, in certain circumstances; (ii) suspend or
override the enforcement provisions or termination rights that might be
invoked by counterparties facing an entity in resolution, as a result of the
exercise of the resolution powers; and (iii) disapply or modify laws in the UK
(with possible retrospective effect) to enable the powers under the Banking
Act to be used effectively.
 
The stabilisation options are intended to be applied prior to the point at
which any insolvency proceedings with respect to the relevant entity would
otherwise have been initiated. Accordingly, the stabilisation options may be
exercised if the relevant UK resolution authority: (i) is satisfied that a UK
bank or investment firm is failing, or is likely to fail; (ii) determines that
it is not reasonably likely that (ignoring the stabilisation powers) action
will be taken by or in respect of a UK bank or investment firm that will
result in condition (i) above ceasing to be met; (iii) considers the exercise
of the stabilisation powers to be necessary, having regard to certain public
interest considerations (such as the stability of the UK financial system,
public confidence in the UK banking system and the protection of depositors,
being some of the special resolution objectives) and (iv) considers that the
special resolution objectives would not be met to the same extent by the
winding-up of the UK bank or investment firm.
 
In the event that the Bank of England seeks to exercise its powers in relation
to a UK banking group company (such as RBSG), the relevant UK resolution
authority has to be satisfied that (A) the conditions set out in (i) to (iv)
above are met in respect of a UK bank or investment firm in the same banking
group (or, in respect of an EEA or third country credit institution or
investment firm in the same banking group, the relevant EEA or third country
resolution authority is satisfied that the conditions for resolution
applicable in its jurisdiction are met) and (B) certain criteria are met, such
as the exercise of the powers in relation to such UK banking group company
being necessary having regard to public interest considerations. The use of
different stabilisation powers is also subject to further 'specific
conditions' that vary according to the relevant stabilisation power being
used. Although the SRR sets out the pre-conditions for determining whether an
institution is failing or likely to fail, it is uncertain how the relevant UK
resolution authority would assess such conditions in any particular
pre-insolvency scenario affecting RBSG and/or other members of the Group and
in deciding whether to exercise a resolution power.  There has been no
application of the SRR powers in the UK to a large financial institution, such
as RBSG, to date, which could provide an indication of the relevant UK
resolution authority's approach to the exercise of the resolution powers, and
even if such examples existed, they may not be indicative of how such powers
would be applied to RBSG. Therefore, holders of shares and other securities
issued by the Group may not be able to anticipate a potential exercise of any
such powers.
 
The UK bail-in tool is one of the powers available to the Bank of England
under the SRR and was introduced under the Banking Reform Act 2013. The UK
government amended the provisions of the Banking Act to ensure the consistency
of these provisions with the bail-in provisions under the BRRD, which
amendments came into effect on 1 January 2015. The UK bail-in tool includes
both a power to write-down or convert capital instruments and triggered at the
point of non-viability of a financial institution and a bail-in tool
applicable to eligible liabilities (including senior unsecured debt securities
issued by the Group) and available in resolution.
 
The capital instruments write-down and conversion power may be exercised
independently of, or in combination with, the exercise of a resolution tool,
and it allows resolution authorities to cancel all or a portion of the
principal amount of capital instruments and/or convert such capital
instruments into common equity Tier 1 instruments when an institution is no
longer viable. The point of non-viability for such purposes is the point at
which the Bank of England or the PRA determines that the institution meets
certain conditions under the Banking Act, for example if the institution will
no longer be viable unless the relevant capital instruments are written down
or extraordinary public support is provided, and without such support the
appropriate authority determines that the institution would no longer be
viable.  The Bank of England may exercise the power to write down or convert
capital instruments without any further exercise of resolution tools, as may
be the case where the write-down or conversion of capital instruments is
sufficient to restore an institution to viability.
 
Where the conditions for resolution exist and it is determined that a
stabilisation power may be exercised, the Bank of England may use the bail-in
tool (in combination with other resolution tools under the Banking Act) to,
among other things, cancel or reduce all or a portion of the principal amount
of, or interest on, certain unsecured liabilities of a failing financial
institution and/or convert certain debt claims into another security,
including ordinary shares of the surviving entity.
 
In addition, the Bank of England may use the bail-in tool to, among other
things, replace or substitute the issuer as obligor in respect of debt
instruments, modify the terms of debt instruments (including altering the
maturity (if any) and/or the amount of interest payable and/or imposing a
temporary suspension on payments) and discontinue the listing and admission to
trading of financial instruments. The exercise of the bail-in tool will be
determined by the Bank of England which will have discretion to determine
whether the institution has reached a point of non-viability or whether the
conditions for resolution are met, by application of the relevant provisions
of the Banking Act, and involves decisions being taken by the PRA and the Bank
of England, in consultation with the FCA and HM Treasury. As a result, it will
be difficult to predict when, if at all, the exercise of the bail-in power may
occur.
 
The potential impact of these powers and their prospective use may include
increased volatility in the market price of shares and other securities issued
by the Group, as well as increased difficulties in issuing securities in the
capital markets and increased costs of raising such funds.
 
If these powers were to be exercised (or there is an increased risk of
exercise) in respect of the Group or any entity within the Group, such
exercise could result in a material adverse effect on the rights or interests
of shareholders which would likely be extinguished or very heavily diluted.
Risk factors continued
Holders of debt securities (which may include holders of senior unsecured
debt), may see the conversion of part (or all) of their claims into equity or
written down in part or written off entirely. In accordance with the rules of
the Special Resolution Regime, the losses imposed on holders of equity and
debt instruments through the exercise of bail-in powers would be subject to
the 'no creditor worse off' safeguard, which requires losses (net of any
compensation received) not to exceed those which would be realised in an
insolvency counterfactual.
 
Although the above represents the risks associated with the UK bail-in power
currently in force in the UK and applicable to the Group's securities, changes
to the scope of, or conditions for the exercise of the UK bail-in power may be
introduced as a result of further political or regulatory developments.  For
example, the application of these powers to internally-issued MREL
instruments, issued by one group entity and held solely by its parent entity,
is currently being consulted on by the Bank of England. In addition, further
political, legal or strategic developments may lead to structural changes to
the Group, including at the holding company level. Notwithstanding any such
changes, the Group expects that its securities would remain subject to the
exercise of a form of bail-in power, either pursuant to the provisions of the
Banking Act, the BRRD or otherwise.
 
The value or effectiveness of any credit protection that the Group has
purchased depends on the value of the underlying assets and the financial
condition of the insulity or whether the
conditions for resolution are met, by application of the relevant provisions
of the Banking Act, and involves decisions being taken by the PRA and the Bank
of England, in consultation with the FCA and HM Treasury. As a result, it will
be difficult to predict when, if at all, the exercise of the bail-in power may
occur. 
 
The potential impact of these powers and their prospective use may include
increased volatility in the market price of shares and other securities issued
by the Group, as well as increased difficulties in issuing securities in the
capital markets and increased costs of raising such funds. 
 
If these powers were to be exercised (or there is an increased risk of
exercise) in respect of the Group or any entity within the Group, such
exercise could result in a material adverse effect on the rights or interests
of shareholders which would likely be extinguished or very heavily diluted. 
 
Risk factors continued 
 
Holders of debt securities (which may include holders of senior unsecured
debt), may see the conversion of part (or all) of their claims into equity or
written down in part or written off entirely. In accordance with the rules of
the Special Resolution Regime, the losses imposed on holders of equity and
debt instruments through the exercise of bail-in powers would be subject to
the 'no creditor worse off' safeguard, which requires losses (net of any
compensation received) not to exceed those which would be realised in an
insolvency counterfactual. 
 
Although the above represents the risks associated with the UK bail-in power
currently in force in the UK and applicable to the Group's securities, changes
to the scope of, or conditions for the exercise of the UK bail-in power may be
introduced as a result of further political or regulatory developments.  For
example, the application of these powers to internally-issued MREL
instruments, issued by one group entity and held solely by its parent entity,
is currently being consulted on by the Bank of England. In addition, further
political, legal or strategic developments may lead to structural changes to
the Group, including at the holding company level. Notwithstanding any such
changes, the Group expects that its securities would remain subject to the
exercise of a form of bail-in power, either pursuant to the provisions of the
Banking Act, the BRRD or otherwise. 
 
The value or effectiveness of any credit protection that the Group has
purchased depends on the value of the underlying assets and the financial
condition of the insurers and counterparties. 
 
The Group has some remaining credit exposure arising from over-the-counter
derivative contracts, mainly credit default swaps (CDSs), and other credit
derivatives, each of which are carried at fair value. 
 
The fair value of these CDSs, as well as the Group's exposure to the risk of
default by the underlying counterparties, depends on the valuation and the
perceived credit risk of the instrument against which protection has been
bought. Many market counterparties have been adversely affected by their
exposure to residential mortgage-linked and corporate credit products, whether
synthetic or otherwise, and their actual and perceived creditworthiness may
deteriorate rapidly. If the financial condition of these counterparties or
their actual or perceived creditworthiness deteriorates, the Group may record
further credit valuation adjustments on the credit protection bought from
these counterparties under the CDSs. The Group also recognises any
fluctuations in the fair value of other credit derivatives. 
 
Any such adjustments or fair value changes may have a material adverse impact
on the Group's financial condition and results of operations. 
 
In the UK and in other jurisdictions, the Group is responsible for
contributing to compensation schemes in respect of banks and other authorised
financial services firms that are unable to meet their obligations to
customers. 
 
In the UK, the Financial Services Compensation Scheme (FSCS) was established
under the Financial Services and Markets Act 2000 and is the UK's statutory
fund of last resort for customers of authorised financial services firms. The
FSCS pays compensation if a firm is unable to meet its obligations. 
 
The FSCS funds compensation for customers by raising levies on the industry,
including the Group. In relation to protected deposits, each deposit-taking
institution contributes towards these levies in proportion to their share of
total protected deposits. 
 
In the event that the FSCS needs to raise additional and unexpected funding,
is required to raise funds more frequently or significantly increases the
levies to be paid by authorised firms, the associated costs to the Group may
have an adverse impact on its results of operations and financial condition. 
 
To the extent that other jurisdictions where the Group operates have
introduced or plan to introduce similar compensation, contributory or
reimbursement schemes, the Group may make further provisions and may incur
additional costs and liabilities, which may have an adverse impact on its
financial condition and results of operations. 
 
The Group intends to execute the run-down and/or the sale of certain
portfolios and assets. Failure by the Group to do so on commercially
favourable terms could have a material adverse effect on the Group's
operations, operating results, financial position and reputation. 
 
The Group's ability to execute the run-down and/or sale of certain portfolios
and assets and the price achieved for such disposals will be dependent on
prevailing economic and market conditions. 
 
As a result, there is no assurance that the Group will be able to sell or run
down these portfolios or assets either on favourable economic terms to the
Group or at all or that it may do so within the intended timetable. Material
tax or other contingent liabilities could arise on the disposal or run-down of
assets and there is no assurance that any conditions precedent agreed will be
satisfied, or consents and approvals required will be obtained in a timely
manner or at all. The Group may be exposed to deteriorations in the portfolios
or assets being sold between the announcement of the disposal and its
completion, which period may span many months. 
 
In addition, the Group may be exposed to certain risks, including risks
arising out of ongoing liabilities and obligations, breaches of covenants,
representations and warranties, indemnity claims, transitional services
arrangements and redundancy or other transaction-related costs, and
counterparty risk in respect of buyers of assets being sold. 
 
The occurrence of any of the risks described above could have a material
adverse effect on the Group's business, results of operations, financial
condition and capital position and consequently may have the potential to
impact the competitive position of part or all of the Group's business. 
 
The Group's results could be adversely affected in the event of goodwill
impairment. 
 
The Group capitalises goodwill, which is calculated as the excess of the cost
of an acquisition over the net fair value of the identifiable assets,
liabilities and contingent liabilities acquired. Acquired goodwill is
recognised initially at cost and subsequently at cost less any accumulated
impairment losses. As required by IFRS Standards, the Group tests goodwill for
impairment annually, or more frequently when events or circumstances indicate
that it might be impaired. 
 
An impairment test involves comparing the recoverable amount (the higher of
the value in use and fair value less cost to sell) of an individual cash
generating unit with its carrying value. 
 
At 31 December 2017, the Group carried goodwill of £5.6 billion on its balance
sheet. The value in use and fair value of the Group's cash-generating units
are affected by market conditions and the performance of the economies in
which the Group operates. 
 
Where the Group is required to recognise a goodwill impairment, it is recorded
in the Group's income statement, but it has no effect on the Group's
regulatory capital position. Further impairments of the Group's goodwill could
have an adverse effect on the Group's results and financial condition. 
 
Changes in tax legislation or failure to generate future taxable profits may
impact the recoverability of certain deferred tax assets recognised by the
Group. 
 
In accordance with IFRS Standards, the Group has recognised deferred tax
assets on losses available to relieve future profits from tax only to the
extent it is probable that they will be recovered. The deferred tax assets are
quantified on the basis of current tax legislation and accounting standards
and are subject to change in respect of the future rates of tax or the rules
for computing taxable profits and offsetting allowable losses. 
 
Failure to generate sufficient future taxable profits or further changes in
tax legislation (including rates of tax) or accounting standards may reduce
the recoverable amount of the recognised deferred tax assets. Changes to the
treatment of deferred tax assets may impact the Group's capital, for example
by reducing further the Group's ability to recognise deferred tax assets. The
implementation of the rules relating to the UK ring-fencing regime and the
resulting restructuring of the Group may further restrict the Group's ability
to recognise tax deferred tax assets in respect of brought forward losses. 
 
Legal Entity Identifier: 2138005O9XJIJN4JPN90 
 
This information is provided by RNS
The company news service from the London Stock Exchange 
 
rers and counterparties.
The Group has some remaining credit exposure arising from over-the-counter
derivative contracts, mainly credit default swaps (CDSs), and other credit
derivatives, each of which are carried at fair value.
 
The fair value of these CDSs, as well as the Group's exposure to the risk of
default by the underlying counterparties, depends on the valuation and the
perceived credit risk of the instrument against which protection has been
bought. Many market counterparties have been adversely affected by their
exposure to residential mortgage-linked and corporate credit products, whether
synthetic or otherwise, and their actual and perceived creditworthiness may
deteriorate rapidly. If the financial condition of these counterparties or
their actual or perceived creditworthiness deteriorates, the Group may record
further credit valuation adjustments on the credit protection bought from
these counterparties under the CDSs. The Group also recognises any
fluctuations in the fair value of other credit derivatives.
 
Any such adjustments or fair value changes may have a material adverse impact
on the Group's financial condition and results of operations.
 
In the UK and in other jurisdictions, the Group is responsible for
contributing to compensation schemes in respect of banks and other authorised
financial services firms that are unable to meet their obligations to
customers.
In the UK, the Financial Services Compensation Scheme (FSCS) was established
under the Financial Services and Markets Act 2000 and is the UK's statutory
fund of last resort for customers of authorised financial services firms. The
FSCS pays compensation if a firm is unable to meet its obligations.
 
The FSCS funds compensation for customers by raising levies on the industry,
including the Group. In relation to protected deposits, each deposit-taking
institution contributes towards these levies in proportion to their share of
total protected deposits.
 
In the event that the FSCS needs to raise additional and unexpected funding,
is required to raise funds more frequently or significantly increases the
levies to be paid by authorised firms, the associated costs to the Group may
have an adverse impact on its results of operations and financial condition.
 
To the extent that other jurisdictions where the Group operates have
introduced or plan to introduce similar compensation, contributory or
reimbursement schemes, the Group may make further provisions and may incur
additional costs and liabilities, which may have an adverse impact on its
financial condition and results of operations.
 
The Group intends to execute the run-down and/or the sale of certain
portfolios and assets. Failure by the Group to do so on commercially
favourable terms could have a material adverse effect on the Group's
operations, operating results, financial position and reputation.
The Group's ability to execute the run-down and/or sale of certain portfolios
and assets and the price achieved for such disposals will be dependent on
prevailing economic and market conditions.
 
As a result, there is no assurance that the Group will be able to sell or run
down these portfolios or assets either on favourable economic terms to the
Group or at all or that it may do so within the intended timetable. Material
tax or other contingent liabilities could arise on the disposal or run-down of
assets and there is no assurance that any conditions precedent agreed will be
satisfied, or consents and approvals required will be obtained in a timely
manner or at all. The Group may be exposed to deteriorations in the portfolios
or assets being sold between the announcement of the disposal and its
completion, which period may span many months.
 
In addition, the Group may be exposed to certain risks, including risks
arising out of ongoing liabilities and obligations, breaches of covenants,
representations and warranties, indemnity claims, transitional services
arrangements and redundancy or other transaction-related costs, and
counterparty risk in respect of buyers of assets being sold.
 
The occurrence of any of the risks described above could have a material
adverse effect on the Group's business, results of operations, financial
condition and capital position and consequently may have the potential to
impact the competitive position of part or all of the Group's business.
 
The Group's results could be adversely affected in the event of goodwill
impairment.
The Group capitalises goodwill, which is calculated as the excess of the cost
of an acquisition over the net fair value of the identifiable assets,
liabilities and contingent liabilities acquired. Acquired goodwill is
recognised initially at cost and subsequently at cost less any accumulated
impairment losses. As required by IFRS Standards, the Group tests goodwill for
impairment annually, or more frequently when events or circumstances indicate
that it might be impaired.
 
An impairment test involves comparing the recoverable amount (the higher of
the value in use and fair value less cost to sell) of an individual cash
generating unit with its carrying value.
 
At 31 December 2017, the Group carried goodwill of £5.6 billion on its
balance sheet. The value in use and fair value of the Group's cash-generating
units are affected by market conditions and the performance of the economies
in which the Group operates.
 
Where the Group is required to recognise a goodwill impairment, it is recorded
in the Group's income statement, but it has no effect on the Group's
regulatory capital position. Further impairments of the Group's goodwill could
have an adverse effect on the Group's results and financial condition.
 
Changes in tax legislation or failure to generate future taxable profits may
impact the recoverability of certain deferred tax assets recognised by the
Group.
In accordance with IFRS Standards, the Group has recognised deferred tax
assets on losses available to relieve future profits from tax only to the
extent it is probable that they will be recovered. The deferred tax assets are
quantified on the basis of current tax legislation and accounting standards
and are subject to change in respect of the future rates of tax or the rules
for computing taxable profits and offsetting allowable losses.
 
Failure to generate sufficient future taxable profits or further changes in
tax legislation (including rates of tax) or accounting standards may reduce
the recoverable amount of the recognised deferred tax assets. Changes to the
treatment of deferred tax assets may impact the Group's capital, for example
by reducing further the Group's ability to recognise deferred tax assets. The
implementation of the rules relating to the UK ring-fencing regime and the
resulting restructuring of the Group may further restrict the Group's ability
to recognise tax deferred tax assets in respect of brought forward losses.
 
 
Legal Entity Identifier: 2138005O9XJIJN4JPN90
 
This information is provided by RNS
The company news service from the London Stock Exchange