Slide 1: RBS Treasury: Structural hedges: a summary
RBS Treasury Structural hedges: a summary 13th June 2018 Information Classification: Public
Slide 2: Contents
Contents Comparison of rolling hedge rate and 3M LIBOR The components of the structural hedge Hedging mechanics Disclosure: structural hedge, earnings sensitivity and reserve sensitivity 2
Slide 3: Comparison of rolling hedge rate and 3M LIBOR
Comparison of rolling hedge rate and 3M LIBOR The aim of structural hedging is to reduce the sensitivity of earnings to interest rate shocks. It also provides some protection against prolonged periods of falling rates. We assign an evenly amortising profile to the core element of some “indefinite ma
Slide 4: The components of the structural hedge
The components of the structural hedge Although ‘structural exposure’ can refer to various risks, the structural hedge is generally understood to refer to the net exposure to indefinite maturity liabilities: • primarily current accounts and also some deposit balances • equity and reserves also a sig
Slide 5: Hedging mechanics
Hedging mechanics The graphic shows how hedges might ‘gross up’ where the tenor of the mortgage fix does not match the structural hedge. Initially, the hedge requirements of the businesses are transferred to Treasury for execution. In this illustration a 2 year pay fixed swap, say, is needed to hedg
Slide 6: Disclosure 1: structural hedge
Disclosure 1: structural hedge We disclose detail on hedges managed directly by Treasury. This includes equity in Treasury’s books and current accounts and deposits in PBB and Commercial Banking. We show the income generated by the hedge in excess of 3M LIBOR, the average notional hedged over the pe
Slide 7: Disclosure 2: earnings sensitivity
Disclosure 2: earnings sensitivity We disclose the sensitivity to a instant parallel shift upwards of 25bps across all yield curves assuming a constant balance sheet. At December 2017 the benefit to interest income was estimated at £178m over 12 months, compared to a scenario where the yield curve f
Slide 8: Disclosure 3: reserve sensitivity
Disclosure 3: reserve sensitivity We also disclose the sensitivity of reserves to up and down instantaneous parallel shifts in interest rates. The main item to note is that most interest rate swaps relating to structural hedging are accounted for as cash flow hedges. The swaps are the primary driver
Slide 9: Disclaimers
Disclaimers The targets, expectations and trends discussed in this presentation represent management’s current expectations and are subject to change, including as a result of the factors described in the “Risk Factors” on pages 372 to 402 of the Annual Report and Accounts 2017. Cautionary statement