Non-Core 8r GRG 'onal Risk and Audit Committee 24 October 2012 FSA Re of West Register Property Executive Sponsor: - Declan Houricani (:er GRG Purpose of Paper: - To give an overview ol the impact of the outcomes olthe recent FSA review oi West Register Properly Polnts tor Notlng: - Ancillary Services undenaking classification removed and all WR UK subs reclassilied into the 'Connecled Counterparly' bucket impacting the capital capacity to continue with new business The current value olassels held in GRG UK subs is GBP1 2bn in a worst case scenario, at the end olzma the IGLs in relation to these exposures may become a capital deduct it the Group is outside of its' IGL limits. - Capital Weighting tor West Register property to be increased to 25% (on a total capital basis under Pillar 2) Currently analysed using a on ratio equivalent). - Total WR owned book totals GBP3 abn. The Pillar 2 add on requires an additional GBP0 5bn of capital to be added - intention to change the WR operating model by acquiring new assets directly onto the RBS balance sheet iollowed by a separate project to transier existing assets onto RES Action Requested: - DRAG is requested to note the impact oi the latest FSA review of West Register Property Distribution: - Committee members and attendees Information Restricted       Background   The  FSA  have  recently  concluded  a  review  of  West  Register  Property  (WR)  and  as  a  result   have  requested  that  WR  comply  with  the  following  changes  to  our  current  operating   model:       ‘Ancillary  Services’  Undertaking   To  date,  West  Register  has  been  classified  by  the  Bank  as  an  Ancillary  Services  Undertaking   based  on  the  FSA  glossary  (Art  4(21)  BCD),  where  its  principal  activity  consists  of  owning  and   managing  property,  and  in  our  opinion,  was  clearly  within  the  definition  prescribed.  Therefore   the  WR  UK  subsidiaries  fell  within  the  Core  UK  Group  as  defined  in  BIPRU  10.8A.2  .     However,  following  the  FSA  challenge  to  the  ‘Ancillary  Services  Undertaking’  classification,  all   relevant  subsidiary  entities  are  to  be  removed  from  the  Core  UK  and  Non-­‐Core  groupings,   totalling  c£1.2bn  at  September  month-­‐end.  All  WR  Property  exposures  will  now  be  classified  as   ‘Connected  Counterparties’,  an  Intra  Group  Limit  (IGL)  reporting  bucket  where  minimal   headroom  presently  exists.  Once  the  FSA  waiver  has  been  removed,  expected  at  the  end  of   2013,  any  IGLs  over  the  Group  threshold  would  be  treated  as  a  direct  capital  deduct.  This  would   result  in  an  increase  in  capital  deduct  of  c£1.2bn.     As  an  interim  measure  to  reduce  the  impact  on  our  IGL  exposure,  we  are  looking  to  move  the   funding  on  as  much  of  the  UK  portfolio  from  RBS  over  to  NWB  which  has  IGL  capacity  available   and  has  been  earmarked  for  use  by  West  Register  Property  only.  We  hope  to  have  moved  the   majority  of  the  book  by  the  end  of  October.       Going  forward,  we  are  proposing  to  book  property  asset  acquisitions  directly  onto  the  balance   sheet  of  RBS  plc  (instead  of  the  West  Register  subsidiaries),  which  would  take  them  out  of  any   IGL  requirement.  A  paper  detailing  this  has  already  been  circulated  to  the  relevant  stakeholders   and  discussions  continue  with  regard  to  mechanics  and  any  impacts  which  may  be  detrimental   to  the  business.  For  the  remainder  of  2012,  if  all  deals  currently  in  the  pipeline  complete,  this   would  result  in  £164m  of  assets  being  booked  onto  the  balance  sheet  of  RBS  plc.     Phase  II  of  this  proposal  would  see  us  looking  to  move  some  of  the  existing  assets  that  are   booked  in  the  WR  subsidiaries  (which  currently  stands  at  c£1.2bn  and  for  which  the  funding  is   being  moved  to    NWB)  onto  the  balance  sheet  of  RBS  plc.  This  will  be  determined  by  business   requirement  and  any  issues  raised  from  the  initial  paper  when  discussing  new  transactions.   Concerns  to  date  that  need  to  be  taken  into  consideration  include  the  following  which  are  all   being  analysed  before  any  decision  is  taken:     • Holding  assets  on  the  RBS  plc  balance  sheet  will  increase  RWAs  at  the  RBS  plc  solo  level   • RBS  plc  is  a  trading  entity  with  reporting  under  ‘IAS  2’  whereas  some  of  the  transactions   going  forward  will  continue  to  be  Investment  portfolios   • Loss  of  indexation  allowance  and  potential  loss  of  Capital  Allowances  on  Investment   properties   Impact  to  recovery  value  if  disposal  via  an  SPV  would  have  been  a  more  optimal  exit   strategy.   • Costly  and  time  intensive  exercise  to  move  a  significant  part  of  the  existing  portfolio  onto   RBS  Plc  from  the  subsidiary  entities.     Given  some  of  these  issues,  we  are  analysing  what  the  optimal  strategy  (in  conjunction  with   Group  Treasury  as  part  of  the  9+3  forecast)  would  be  with  regards  to  how  much  of  the  portfolio   we  could  move  onto  the  RBS  plc  balance  sheet  versus  remaining  in  the  existing  structure  while   using  IGL  capacity.       • Capital  Charge   Up  to  now,  owned  assets  were  treated  as  non-­‐credit  exposures  and  received  a  100%  RWA   weighting.  As  part  of  the  capital  guidance  (ICG)  issued  to  RBS  by  the  FSA,  the  minimum  capital   requirement  for  these  assets  (West  Register)  on  a  global  basis  has  been  increased  from  8%  to   25%  (on  a  total  capital  basis)  which  they  believe  more  accurately  reflects  the  risk  of  this  book.   Currently  we  assess  the  book  against  a  12%  CT1  -­‐  the  extra  threshold  accounts  for  a  c£550m   capital  increase.  As  a  result,  any  proposed  transactions  will  now  carry  a  dual  capital  analysis  on  a   Tier  1  and  total  capital  basis  incorporating  the  revised  minimum  threshold.  This  does  not  impact   reported  RWA  numbers.   The  FSA  have  also  stated  that  they  reserve  the  right  to  alter  the  25%  if  the  book  materially   increases  or  decreases.