REG - Royal Bk Scot.Grp. - Final Results - Part 2 <Origin Href="QuoteRef">RBS.L</Origin> - Part 10

NatwestAnnouncement

26/02/2015 07:14

- Part 10: For the preceding part double click  ID:nRSZ9136Fi 

this linked to risk weighted assets for the purposes of simplicity. 
 
However, if a breach of the leverage buffers (both G-SIB and countercyclical) were to occur then a recovery plan would need
to be discussed with the PRA.  The current Group leverage ratio is 4.2% fully met through CET1 leaving it above the minimum
requirement while the countercyclical buffer is close to zero. 
 
In addition to the capital requirements under CRD IV, the bank resolution and recovery directive ("BRRD") introduces
requirements for banks to maintain at all times a sufficient aggregate amount of own funds and "eligible liabilities" (that
is, liabilities that may be bailed in using the bail-in tool), known as the minimum requirements for eligible liabilities
("MREL"). The aim is that the minimum amount should be proportionate and adapted for each category of bank on the basis of
their risk or the composition of their sources of funding. The UK Government has transposed the BRRD's provisions into law
with a requirement that the Bank of England implements further secondary legislation to implement MREL requirements by 2016
which will take into account the regulatory technical standards to be developed by the EBA specifying the assessment
criteria that resolution authorities should use to determine the minimum requirement for own funds and eligible liabilities
for individual firms. The EBA noted that the technical standards would be compatible with the proposed term sheet published
by the FSB on total loss absorbing capacity ("TLAC") requirements for GSIBs but there remains a degree of uncertainty as to
the extent to which MREL and TLAC requirements may differ. As the implementation of capital and loss absorption
requirements under BRRD in the UK is subject to adoption of secondary legislation and subject to PRA supervisory discretion
in places, and the implementation and scope of TLAC remains subject to significant uncertainty, the Group is currently
unable to predict the impact such rules would have on its overall capital and loss absorption requirements or its ability
to comply with applicable capital or loss absorbency requirements or to make certain discretionary distributions. 
 
Appendix 5 Risk factors 
 
Building on changes made to requirements in relation to the quality and aggregate quantity of capital that banks must hold,
the Basel Committee and other agencies are increasingly focussed on changes that will increase, or re-calibrate, measures
of risk weighted assets as the key measure of the different categories of risk in the denominator of the risk-based capital
ratio. There is no current global consensus regarding the key objectives of this further evolution of the international
capital framework. One extreme position advocated by some regulators would materially deemphasise the role of a risk-based
capital ratio.  A more broadly held opinion among regulators seeks to retain the ratio but also reform it, in particular by
addressing perceived excessive complexity and variability between banks and banking systems. In particular, the Basel
Committee on Banking Supervision published a consultation paper in December 2014, in which it recommended reduced reliance
on external credit ratings when assessing risk weighted assets and to replace such ratings with certain risk drivers based
on the particular type of exposure of each asset. While they are at different stages of maturity, a number of initiatives
across risk types and business lines are in progress that will impact RWAs at their conclusion.  While the quantum of
impacts is uncertain owing to lack of clarity of definition of the changes and the timing of their introduction, the
likelihood of an impact resulting from each initiative is high and such impacts could result in higher levels of risk
weighted assets. 
 
The Basel Committee changes and other future changes to capital adequacy and loss absorbency and liquidity requirements in
the European Union, the UK, the US and in other jurisdictions in which the Group operates, including the Group's ability to
satisfy the increasingly stringent stress case scenarios imposed by regulators and the adoption of the MREL and TLAC
proposals, may require the Group to issue Tier 1 capital (including CET1), Tier 2 capital and certain loss absorbing debt
securities, and may result in existing Tier 1 and Tier 2 securities issued by the Group ceasing to count towards the
Group's regulatory capital. The requirement to increase the Group's levels of CET1 and Tier 2 capital, or loss absorbing
debt securities, which could be mandated by the Group's regulators, could have a number of negative consequences for the
Group and its shareholders, including impairing the Group's ability to pay dividends on, or make other distributions in
respect of, ordinary shares and diluting the ownership of existing shareholders of the Group. If the Group is unable to
raise the requisite amount of Tier 1 and Tier 2 capital, or loss absorbing debt securities it may be required to reduce
further the amount of its risk weighted assets or total assets and engage in the disposal of core and other non-core
businesses, which may not occur on a timely basis or achieve prices which would otherwise be attractive to the Group. 
 
On a fully loaded Basel III basis, the Group's CET1 ratio was 11.2% at December 31, 2014. The Group's Transformation Plan
targets a fully loaded Basel III CET1 ratio of 13% over the restructuring period. The Group's ability to achieve such
targets depends on a number of factors, including the implementation of the ring-fence, the execution of the restructuring
of the Group's CIB business and the implementation of the 2013/2014 Strategic Plan, which includes plans for a further
significant restructuring of the Group as well as further sales of its remaining stake in CFG in the U.S. See 'Forward
looking Statements' and 'The Group's ability to achieve its capital targets will depend on the success of the Group's plans
to further reduce the size of its business through the restructuring of its corporate and institutional banking business
and make further divestments of certain of its portfolios and businesses including its remaining stake in Citizens
Financial Group'. 
 
Any change that limits the Group's ability to implement its capital plan, to access funding sources or to manage
effectively its balance sheet and capital resources (including, for example, reductions in profits and retained earnings as
a result of write-downs or otherwise, increases in risk-weighted assets, regulatory changes, actions by regulators, delays
in the disposal of certain key assets or the inability to syndicate loans as a result of market conditions, a growth in
unfunded pension exposures or otherwise) could have a material adverse effect on its business, financial condition and
regulatory capital position. 
 
Appendix 5 Risk factors 
 
The Group's borrowing costs, its access to the debt capital markets and its liquidity depend significantly on its credit
ratings and, to a lesser extent, on the rating of the UK Government 
 
The credit ratings of RBSG, RBS and other Group members directly affect the cost of, access to and sources of their
financing and liquidity. A number of UK and other European financial institutions, including RBSG, the Royal Bank and other
Group members, have been downgraded multiple times in recent years in connection with rating methodology changes, a review
of systemic support assumptions incorporated into bank ratings and the likelihood, in the case of UK banks, that the UK
Government is more likely in the future to make greater use of its resolution tools that allow burden sharing with debt
holders. In 2014 credit ratings of RBSG, the Royal Bank and other Group members were downgraded in connection with the
Group's creation of RCR, coupled with concerns about execution risks, litigation risk and the potential for conduct related
fines. RBSG's long-term and short-term credit ratings were further downgraded by two notches in 2015 by Standard & Poor's
Rating Services ("S&P") to reflect S&P's view that extraordinary government support would now be unlikely in the case of UK
non-operating bank holding companies and is likely to become less predictable for bank operating companies in the UK under
the newly enacted legislation implementing the bail-in provisions of the BRRD.  Rating agencies continue to evaluate the
rating methodologies applicable to UK and European financial institutions and any change in such rating agencies'
methodologies could materially adversely affect the credit ratings of Group companies. 
 
Any further reductions in the long-term or short-term credit ratings of RBSG or one of its principal subsidiaries
(particularly the Royal Bank) would increase borrowing costs, require the Group to replace funding lost due to the
downgrade, which may include the loss of customer deposits, and might also limit the Group's access to capital and money
markets and trigger additional collateral requirements in derivatives contracts and other secured funding arrangements. At
31 December 2014, a simultaneous one notch long-term and associated short-term downgrade in the credit ratings of RBSG and
the Royal Bank by the three main ratings agencies would have required the Group to post estimated additional collateral of
£4.5 billion, without taking account of mitigating action by management. 
 
Any downgrade in the UK Government's credit ratings could adversely affect the credit ratings of Group companies and may
have the effects noted above.  Credit ratings of RBSG, the Royal Bank, The Royal Bank of Scotland N.V. (RBS N.V.) and
Ulster Bank Limited are also important to the Group when competing in certain markets, such as over-the-counter
derivatives. As a result, any further reductions in RBSG's long-term or short-term credit ratings or those of its principal
subsidiaries could adversely affect the Group's access to liquidity and its competitive position, increase its funding
costs and have a material adverse impact on the Group's earnings, cash flow and financial condition. 
 
The Group's ability to meet its obligations including its funding commitments depends on the Group's ability to access
sources of liquidity and funding 
 
Liquidity risk is the risk that a bank will be unable to meet its obligations, including funding commitments, as they fall
due. This risk is inherent in banking operations and can be heightened by a number of factors, including an over reliance
on a particular source of wholesale funding (including, for example, short-term and overnight funding), changes in credit
ratings or market-wide phenomena such as market dislocation and major disasters. Credit markets worldwide, including
interbank markets, have experienced severe reductions in liquidity and term-funding during prolonged periods in recent
years. Although credit markets continued to improve during 2014 and such markets remain accommodating in the early part of
2015 (in part as a result of measures taken by central banks around the world, including the ECB), and the Group's overall
liquidity position remained strong, certain European banks, in particular in the peripheral countries of Spain, Portugal,
Greece, Italy and Ireland, remained reliant on central banks as one of their principal sources of liquidity. Although the
measures taken by Central Banks have had a positive impact, the risk of volatility returning to the global credit markets
remains. 
 
Appendix 5 Risk factors 
 
The market view of bank credit risk has changed radically as a result of the financial crisis and banks perceived by the
market to be riskier have had to issue debt at significant spreads. Any uncertainty relating to the credit risk of
financial institutions may lead to reductions in levels of interbank lending and may restrict the Group's access to
traditional sources of funding or increase the costs of accessing such funding. The ability of the Group's regulator to
bail-in senior and subordinated debt under the provisions of BRRD implemented in the UK since January 2015 may also
increase investors' perception of risk and hence affect the availability and cost of funding for the Group. 
 
Management of the Group's liquidity and funding focuses, among other things, on maintaining a resilient funding strategy
for its assets in line with the Group's wider strategic plan.  Although conditions have improved, there have been recent
periods where corporate and financial institution counterparties have reduced their credit exposures to banks and other
financial institutions, limiting the availability of these sources of funding. Under certain circumstances, the Group may
need to seek funds from alternative sources potentially at higher costs than has previously been the case, and/or with
higher collateral or may be required to consider disposals of other assets not previously identified for disposal to reduce
its funding commitments. The Group has, at times, been required to rely on shorter-term and overnight funding with a
consequent reduction in overall liquidity, and to increase its recourse to liquidity schemes provided by central banks.
Such schemes require assets to be pledged as collateral.  Changes in asset values or eligibility criteria can reduce
available assets and consequently available liquidity, particularly during periods of stress when access to the schemes may
be needed most. 
 
The Group relies on customer deposits to meet a considerable portion of its funding and it has targeted maintaining a loan
to deposit ratio of around 100%. The level of deposits may fluctuate due to factors outside the Group's control, such as a
loss of confidence, increasing competitive pressures for retail customer deposits or the repatriation of deposits by
foreign wholesale or central bank depositors, which could result in a significant outflow of deposits within a short period
of time. An inability to grow, or any material decrease in, the Group's deposits could, particularly if accompanied by one
of the other factors described above, have a material adverse impact on the Group's ability to satisfy its liquidity
needs. 
 
The occurrence of any of the risks described above could have a material adverse impact on the Group's financial condition
and results of operations. 
 
The Group's businesses are subject to substantial regulation and oversight. Significant regulatory developments and
increased scrutiny by the Group's key regulators has had and is likely to continue to increase compliance risks and could
have a material adverse effect on how the Group conducts its business and on its results of operations and financial
condition 
 
The Group is subject to extensive financial services laws, regulations, corporate governance requirements, administrative
actions and policies in each jurisdiction in which it operates. Many of these have changed recently and are subject to
further material changes.  Among others, the adoption of rules relating to ring-fencing, prohibitions on proprietary
trading, the entry into force of CRD IV and the BRRD and certain other measures in the UK, the EU and the US has
considerably affected the regulatory landscape in which the Group operates and will operate in the future. Increasing
regulatory focus in certain areas and ongoing and possible future changes in the financial services regulatory landscape
(including requirements imposed by virtue of the Group's participation in government or regulator-led initiatives), have
resulted in the Group facing greater regulation and scrutiny in the UK, the US and other countries in which it operates. 
 
Appendix 5 Risk factors 
 
Although it is difficult to predict with certainty the effect that the recent regulatory changes, developments and
heightened levels of public and regulatory scrutiny will have on the Group, the enactment of legislation and regulations in
the UK and the EU, the other parts of Europe in which the Group operates and the US  has resulted in increased capital,
funding and liquidity requirements, changes in the competitive landscape, changes in other regulatory requirements and
increased operating costs and has impacted, and will continue to impact, products offerings and business models. See also
'Implementation of the ring-fence in the UK which will begin in 2015 will result in material structural changes to the
Group's business. These changes could have a material adverse effect on the Group'. Such changes may also result in an
increased number of regulatory investigations and proceedings and have increased the risks relating to the Group's ability
to comply with the applicable body of rules and regulations in the manner and within the timeframes required. 
 
Any of these developments (including failures to comply with new rules and regulations) could have an impact on how the
Group conducts its business, its authorisations and licences, the products and services it offers, its reputation, the
value of its assets, and could have a material adverse effect on its business, funding costs and its results of operations
and financial condition.  See 'Implementation by the Group of the various initiatives and programmes which form part of the
Group's Transformation Plan subjects the Group to increased and material execution risk'. 
 
Areas in which, and examples of where, governmental policies, regulatory and accounting changes and increased public and
regulatory scrutiny could have an adverse impact (some of which could be material) on the Group include those set out above
as well as the following: 
 
 ●  requirements to separate retail banking from investment banking (ring-fencing);                                                                                                                                     
                                                                                                                                                                                                                      
 ●  restrictions on proprietary trading and similar activities within a commercial bank and/or a group which contains a commercial bank;                                                                                
                                                                                                                                                                                                                        
 ●  the implementation of additional or conflicting capital, loss absorption or liquidity requirements, including those mandated under MREL or by the Financial Stability Board's recommendations on TLAC;