Abbreviations and acronyms
AT1
Additional Tier 1
EU
European Union
AIRB
Advanced Internal Ratings Based
ECL
Expected Credit Losses
AC
Amortised Cost
EL
Expected Loss
ARA
Annual Report and Accounts
EPE
Expected Positive Exposure
ALCo
Asset and Liability Management Committee
EAD
Exposure at Default
AQ
Asset Quality
ECAI
External Credit Assessment Institution
ABCP
Asset-Backed Commercial Paper
ESG
Environmental, Social and Corporate Governance
ABS
Asset-Backed Securities
FVOCI
Fair Value Through Other Comprehensive Income
AUM
Assets Under Management
FCA
Financial Conduct Authority
AUMA
Assets Under Management and Administration
FI
Financial Institution
BBLS
Bounce Back Loan Scheme
FSCS
Financial Services Compensation Scheme
BoE
Bank of England
FSB
Financial Stability Board
BCBS
Basel Committee on Banking Supervision
FTSE
Financial Times Stock Exchange
BRC
Board Risk Committee
FVA
Funding Valuation Adjustment
CBILS
Coronavirus Business Interruption Loan Scheme
GSIB
Global Systemically Important Bank
CLBILS
Coronavirus Large Business Interruption Loan Scheme
GDP
Gross Domestic Product
CRD
Capital Requirements Directive
HFT
Held-For-Trading
CRR
Capital Requirements Regulation
HMT
HM Treasury
CCP
Central Clearing Counterparty
HPI
House Price Index
CDs
Certificates of Deposit
HTC
Hold to Collect
CDO
Collateralised Debt Obligation
HTCS
Hold to Collect or Sell
CET1
Common Equity Tier 1
IRC
Incremental Risk Charge
CEC
Control Environment Certification
IPV
Independent Price Verification
CCR
Counterparty Credit Risk
IBOR
Interbank Offered Rate
CCF
Credit Conversion Factor
IRHP
Interest Rate Hedging Product
CCI
Credit Cycle Indices
IRRBB
Interest Rate Risk in the Banking Book
CDS
Credit Default Swap
ICAAP
Internal Capital Adequacy Assessment Process
CI
Credit Institution
ILAAP
Internal Liquidity Adequacy Assessment Process
CLN
Credit Linked Note
IMA
Internal Model Approach
CQS
Credit Quality Steps
IMM
Internal Model Method
CRE
Commercial Real Estate
IRB
Internal Ratings Based Approach
CRM
Credit Risk Mitigation
IAS
International Accounting Standards
CVA
Credit Valuation Adjustment
IASB
International Accounting Standards Board
DOIR
Date of Initial Recognition
IFRS
International Financial Reporting Standard
DVA
Debt Valuation Adjustment
LCR
Liquidity Coverage Ratio
DFVTPL
Designated as at Fair Value Through Profit or Loss
LTV
Loan-to-Value
DECL
Disclosures on Expected Credit Losses
LIBOR
London Interbank Offered Rate
DSIB
Domestic Systemically Important Bank
LGD
Loss Given Default
DINED
Double Independent Non-Executive Director
MFVTPL
Mandatory Fair Value Through Profit or Loss
EEPE
Effective Expected Positive Exposure
MRT
Material Risk Taker
EIR
Effective Interest Rate
MiFID
Markets in Financial Instruments Directive
EURIBOR
Euro Interbank Offered Rate
MTM
Mark-to-Market
EBA
European Banking Authority
MDA
Maximum Distributable Amount
ECB
European Central Bank
MTNs
Medium Term Notes
EC
European Commission
MCR
Minimum Capital Requirements
Abbreviations and acronyms
MREL
Minimum Requirement for own funds and Eligible Liabilities
SEC
MES
Multiple Economic Scenarios
SDGs
NWB
Group
NatWest Bank Group
SFTs
NWB Plc
National Westminster Bank Plc
SSPE
NWH
Group
NatWest Holdings Group
SICR
NWH Ltd
NatWest Holdings Limited
SME
NWG
NatWest Group
SPE
NWM N.V.
NatWest Markets N.V.
SPPI
NWM Plc
NatWest Markets Plc
SDNY
NWMSI
NatWest Markets Securities Inc
SCRA
NIM
Net Interest Margin
S&P
NSFR
Net Stable Funding Ratio
STD
NPE
Non-Performing Exposure
SONIA
NPS
Net Promoter Scores
SVaR
NTIRR
Non-Traded Interest Rate Risk
SE
NI
Northern Ireland
SLL
OTC
Over-the-Counter
TCFD
OCA
Own Credit Adjustment
TNAV
PPI
Payment Protection Insurance
RBS plc
PDMR
Persons Discharging Managerial Responsibilities
T1
PFE
Potential Future Exposure
T2
PD
Probability of Default
TCR
PMA
Post Model Adjustment
TLAC
PRA
Prudential Regulation Authority
TSR
PRB
United Nations Principles for Responsible Banking
UK
DoLSub
PVA
Prudent Valuation Adjustment
UKGI
POCI
Purchased or Originated Credit Impaired
UBI DAC
QCCP
Qualifying Central Clearing Counterparty
UK
RBA
Ratings Based Approach
UNEP FI
RoI
Republic of Ireland
US/USA
RMBS
Residential Mortgage-Backed Aecurities
VaR
RoW
Rest of the World
RPI
Retail Price Index
RFB
Ring-fenced Banking Entities
RFRs
Risk Free Rates
RNIV
Risks not in VaR
RWAs
Risk-Weighted Assets
RWAE
RWA adjusted for the equivalent capital deductions
Glossary of terms
Alpha - in the context of regulatory capital for counterparty credit risk,
under the internal model method, alpha is a multiplier applied to the
effective expected positive exposure (EPE) to determine the exposure
at default. Alpha may be set using an own estimate with a floor of 1.2.
It accounts for the extra capital needed for derivatives, compared to
loans with the same EPE, to reflect the additional risks.
Arrears - the aggregate of contractual payments due on a debt that
has not been met by the borrower. A loan or other financial asset is
said to be 'in arrears' when payments have not been made.
Asset Quality (AQ) band - probability of default banding for all
counterparties on a scale of 1 to 10.
Asset-Backed Commercial Paper (ABCP) - a form of asset-backed
security generally issued by a commercial paper conduit.
Asset-Backed Securities (ABS) - securities that represent interests in
specific portfolios of assets. They are issued by a structured entity
following a securitisation. The underlying portfolios commonly
comprise residential or commercial mortgages but can include any
class of asset that yields predictable cash flows. Payments on the
securities depend primarily on the cash flows generated by the assets
in the underlying pool and other rights designed to assure timely
payment, such as guarantees or other credit enhancements.
Collateralised debt obligations, collateralised loan obligations,
commercial mortgage backed securities and residential mortgage
backed securities are all types of ABS.
Assets under management - assets managed by NatWest Group on
behalf of clients.
Back-testing - statistical techniques that assess the performance of a
model, and how that model performed against historical actuals.
Bank deposits - money deposited with NatWest Group by banks and
recorded as liabilities. They include money-market deposits, securities
sold under repurchase agreements, federal funds purchased and other
short term deposits. Deposits received from customers are recorded
as customer deposits.
Basel III – issued by the Basel committee: ‘Basel III: A global
regulatory framework for more resilient banks and banking systems’
and ‘Basel III: International framework for liquidity risk measurement,
standards and monitoring’.
Capital Requirements Regulation (CRR) - refer to CRD IV.
Certificates of Deposit (CDs) - bearer negotiable instruments
acknowledging the receipt of a fixed term deposit at a specified
interest rate.
Climate and sustainable funding and financing - Funding and financing
for climate and sustainable finance to support transition towards a low
carbon and climate resilient economy. NatWest Group use internally
defined Climate and Sustainable Finance Inclusion Criteria (CSFI
criteria) published in 2020 to determine the assets, activities and
companies that are eligible to be counted towards its £20 billion target
for climate and sustainable funding and financing.
Climate risk – the risk arising from the effects of, and exposure to,
climate change..
Collateralised Debt Obligations (CDOs) - asset-backed securities for
which the underlying asset portfolios are debt obligations: either bonds
(collateralised bond obligations) or loans (collateralised loan
obligations) or both. The credit exposure underlying synthetic CDOs
derives from credit default swaps. The CDOs issued by an individual
vehicle are usually divided in different tranches: senior tranches (rated
AAA), mezzanine tranches (AA to BB), and equity tranches (unrated).
Losses are borne first by the equity securities, next by the junior
securities, and finally by the senior securities; junior tranches offer
higher coupons (interest payments) to compensate for their increased
risk.
Commentary – adjusted periodically for specific items - NatWest
Group and segmental business performance commentary have been
adjusted for the impact of specific items such as the Alawwal bank
merger, additional authorised push payments fraud costs, FX recycling
gains, notable items, strategic, litigation and conduct costs
Commercial Paper (CP) - unsecured obligations issued by a corporate
or a bank directly or secured obligations (asset-backed CP), often
issued through a commercial paper conduit, to fund working capital.
Maturities typically range from two to 270 days. However, the depth
and reliability of some CP markets means that issuers can repeatedly
roll over CP issuance and effectively achieve longer term funding. CP
is issued in a wide range of denominations and can be either
discounted or interest-bearing.
Commercial Paper Conduit - a structured entity that issues commercial
paper and uses the proceeds to purchase or fund a pool of assets.
The commercial paper is secured on the assets and is redeemed
either by further commercial paper issuance, repayment of assets or
liquidity drawings.
Commercial Real Estate (CRE) - freehold and leasehold properties
used for business activities. Commercial real estate includes office
buildings, industrial property, medical centres, hotels, retail stores,
shopping centres, agricultural land and buildings, warehouses,
garages etc.
Commodity price risk - the risk that the fair value of a position will alter
due to a change in commodity prices.
Common Equity Tier 1 capital (CET1) - the highest quality form of
regulatory capital under Basel III comprising common shares issued
and related share premium, retained earnings and other reserves
excluding reserves which are restricted or not immediately available,
less specified regulatory adjustments.
Compliance risk - the risk that the behaviour towards customers fails to
comply with laws, regulations, rules, standards and codes of conduct.
Such a failure may lead to breaches of regulatory requirements,
organisational standards or customer expectations and could result in
legal or regulatory sanctions, material financial loss or reputational
damage.
Conduct risk - the risk that the conduct of staff towards customers – or
in the markets in which it operates – leads to unfair or inappropriate
customer outcomes and results in reputational damage, financial loss
or both.
Contractual maturity - the date in the terms of a financial instrument on
which the last payment or receipt under the contract is due for
settlement.
COP 26 - The COP26 refers to 26th UN Climate Change Conference
of the Parties. The summit will bring parties together to accelerate
action towards the goals of the Paris Agreement and the UN
Framework Convention on Climate Change. The UK will host COP 26
in Glasgow during November 2021. NatWest Group is principal
banking partner for COP 26.
Cost:income ratio - total operating expenses less operating lease
depreciation divided by total income less operating lease depreciation.
Glossary of terms
Counterparty credit risk - the risk that a counterparty defaults before
the maturity of a derivative or sale and repurchase contract. In contrast
to non-counterparty credit risk, the exposure to counterparty credit risk
varies by reference to a market factor (e.g. interest rate, exchange
rate, asset price).
Coverage ratio – Expected Credit Loss/impairment provisions as a
percentage of loans.
Covered bonds - debt securities backed by a portfolio of mortgages
that are segregated from the issuer's other assets solely for the benefit
of the holders of the covered bonds.
CDP - (formally Carbon Disclosure Project) Not-for-profit charity that
runs the global disclosure system for investors, companies, cities,
states and regions to manage their environmental impacts.
CRD IV - the European Union has implemented the Basel III capital
proposals through the CRR and the CRD, collectively known as CRD
IV. CRD IV was implemented on 1 January 2014. The EBA’s technical
standards are still to be finalised through adoption by the European
Commission and implemented within the UK.
Credit Conversion Factor (CCF) - the CCF is an estimate of the
proportion of undrawn commitments that will be drawn at the point of
default. It is used in determining EAD and reflects the assumption that
drawn balance at default might be greater than the current balance.
Credit Default Swap (CDS) – a derivative contract where the protection
seller receives premium or interest-related payments in return for
contracting to make payments to the protection buyer upon a defined
credit event in relation to a reference financial asset or portfolio of
financial assets. Credit events usually include bankruptcy, payment
default and rating downgrades.
Credit derivatives - contractual agreements that provide protection
against a credit event on one or more reference entities or financial
assets. The nature of a credit event is established by the protection
buyer and protection seller at the inception of a transaction, and such
events include bankruptcy, insolvency or failure to meet payment
obligations when due. The buyer of the credit derivative pays a
periodic fee in return for a payment by the protection seller upon the
occurrence of a credit event. Credit derivatives include credit default
swaps, total return swaps and credit swap options.
Credit enhancements - techniques that improve the credit standing of
financial obligations; generally those issued by a structured entity in a
securitisation. External credit enhancements include financial
guarantees and letters of credit from third party providers. Internal
enhancements include excess spread - the difference between the
interest rate received on the underlying portfolio and the coupon on the
issued securities; and over-collateralisation – at inception, the value of
the underlying portfolio is greater than the securities issued.
Credit grade - a rating that represents an assessment of the
creditworthiness of a customer. It is a point on a scale representing the
probability of default of a customer.
Credit risk - the risk of financial loss due to the defect of a customer, or
counterparty, to meet its obligation to settle outstanding amounts.
Credit risk mitigation - reducing the credit risk of an exposure by
application of netting, collateral, guarantees and credit derivatives.
Credit spread risk - the risk that customers and counterparties fail to
meet their contractual obligation to settle outstanding amounts.
Credit valuation adjustment (CVA) capital charge - the purpose of this
charge is to improve the resilience of banks to potential mark-to-
market losses associated with deterioration in the creditworthiness of
counterparties in non-cleared derivative trades. Under CRR rules, the
charge is calculated using either the advanced approach or the
standardised approach.
Currency swap - an arrangement in which two parties exchange
specific principal amounts of different currencies at inception and
subsequently interest payments on the principal amounts. Often, one
party will pay a fixed rate of interest, while the other will pay a floating
rate (though there are also fixed-fixed and floating-floating currency
swaps). At the maturity of the swap, the principal amounts are usually
re-exchanged.
Customer deposits - money deposited with NatWest Group by
counterparties other than banks and classified as liabilities and
measured at amount it costs under IFRS 9. They include demand,
savings and time deposits; securities sold under repurchase
agreements; and other short term deposits. Deposits received from
banks are classified as bank deposits.
Date of initial recognition (DOIR) - the reference date used to assess a
significant increase in credit risk is as follows. Term lending: the date
the facility became available to the customer. 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 three year review or the date of any
subsequent limit increases. Current accounts/overdrafts: the account
opening date or, if later, the date of initial granting of overdraft facility
or of limit increases.
Debt securities - transferable instruments creating or acknowledging
indebtedness. They include debentures, bonds, certificates of deposit,
notes and commercial paper. The holder of a debt security is typically
entitled to the payment of principal and interest, together with other
contractual rights under the terms of the issue, such as the right to
receive certain information. Debt securities are generally issued for a
fixed term and redeemable by the issuer at the end of that term. Debt
securities can be secured or unsecured.
Debt securities in issue - unsubordinated debt securities issued by
NatWest Group. They include commercial paper, certificates of
deposit, bonds and medium-term notes.
Deferred tax asset - income taxes recoverable in future periods as a
result of deductible temporary differences (temporary differences
between the accounting and tax base of an asset or liability that will
result in tax deductible amounts in future periods) and the carry-
forward of tax losses and unused tax credits.
Deferred tax liability - income taxes payable in future periods as a
result of taxable temporary differences (temporary differences between
the accounting and tax base of an asset or liability that will result in
taxable amounts in future periods).
Defined benefit obligation - the present value of expected future
payments required to settle the obligations of a defined benefit plan
resulting from employee service.
Derivative - a contract or agreement whose value changes with
changes in an underlying variable such as interest rates, foreign
exchange rates, share prices or indices and which requires no initial
investment or an initial investment that is smaller than would be
required for other types of contracts with a similar response to market
factors. The principal types of derivatives are: swaps, forwards, futures
and options.
Glossary of terms
Discontinued operation - a component of NatWest Group that either
has been disposed of or is classified as held for sale. A discontinued
operation is either: a separate major line of business or geographical
area of operations or part of a single co-ordinated plan to dispose of a
separate major line of business or geographical area of operations; or
a subsidiary acquired exclusively with a view to resale.
ECL loss rate - the annualised loan impairment charge divided by
gross customer loans
Economic capital - an internal measure of the capital required by
NatWest Group to support the risks to which it is exposed.
Economic hedges - economic risks whose hedges have not been
designated in accordance with IFRS.
Economic profit - the difference between the return on shareholders
funds and the cost of that capital. Economic profit is usually expressed
as a percentage.
Effective expected positive exposure (EEPE) - a measure used to
determine EAD for OTC derivatives under the internal model method.
It is calculated as the weighted average of non-decreasing expected
positive exposures. The weight of each exposure is calculated as a
percentage of total expected exposure over the relevant period. When
calculating the minimum capital requirement, the average is taken over
the first year.
Effective interest rate method - 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.
Encumbrance - usually restricts the asset’s transferability until the
encumbrance is removed.
Energy performance certificate (EPC) - A report that assesses the
energy efficiency of a property and recommends specific ways in
which the efficiency of a property could be improved. Certification is
graded from A (most efficient) to G (least efficient).
Equity price risk - the risk that the fair value of a position will alter due
to a change in equity prices. Equity risk is the risk of changes in the
market price of the equities or equity instruments arising from
positions, either long or short, in equities or equity-based financial
instruments.
Expected credit loss (ECL, an IFRS 9 accounting measure) – generally
is the weighted average of credit losses; for modelled portfolios it is the
product of the exposure, probability of default at the reporting date and
the lifetime loss given default. At initial recognition of a financial asset,
an allowance is made for the 12 month expected credit loss (Stage 1),
using the probability of default in the first 12 months only. Following a
significant increase in credit risk (Stage 2), the expected credit loss is
increased to the lifetime probability of default. ECL is applied to
financial assets and contractual facilities whose performance is not
recognised at fair value through P&L in the income statement.
Expected loss (EL, a regulatory measure) – is the product of the
regulatory credit exposure, the probability of default over the next 12
months, averaged through an economic cycle, and the downturn loss
given default. It is applied to exposures whether performance is
recognised in income or reserves. Credit exposures include all
financial assets, customer facilities and are subject to regulatory
overlays.
Exposure - a claim, contingent claim or position which carries a risk of
financial loss.
Exposure at default (EAD) – an estimate of the extent to which the
bank will be exposed under a specific facility, in the event of the
default of a counterparty. IFRS 9 - expected balance sheet exposure
at default. It differs from the regulatory method as follows:
– It includes the effect of amortisation; and
– It caps exposure at the contractual limit.
Exposure class - exposures are assigned to classes defined under
CRR, namely article 147 for the advanced IRB approach and article
112 for the standardised approach. This classification is required by
the regulatory framework when calculating the capital requirements of
banks.
Fair value - the amount for which an asset could be exchanged or a
liability settled, between knowledgeable and willing parties in an arm’s
length transaction.
Financial Conduct Authority (FCA) - the statutory body responsible for
conduct of business regulation and supervision of UK authorised firms
from 1 April 2013. The FCA also has responsibility for the prudential
regulation of firms that do not fall within the PRA’s scope.
Financial Guarantee contracts - A contract that requires the issuer to
make specified payments to reimburse the holder for a loss it incurs
because a specified debtor fails to make payment when due in
accordance with the original or modified terms of a debt instrument.
Financial Services Compensation Scheme (FSCS) - the UK's statutory
fund of last resort for customers of authorised financial services firms.
It pays compensation if a firm is unable to meet its obligations. The
FSCS funds compensation for customers by raising management
expenses levies and compensation levies on the financial services
industry.
Forbearance - forbearance takes place when a concession is made on
the contractual terms of a loan in response to a customer’s financial
difficulties.
Foreign currency price risk - the risk that the fair value of a position will
alter due to a change in foreign exchange rates.
Forward contract - a contract to buy (or sell) a specified amount of a
physical or financial commodity, at an agreed price, at an agreed
future date.
Funded assets - total assets less derivatives.
Futures contract - a contract which provides for the future delivery (or
acceptance of delivery) of some type of financial instrument or
commodity under terms established at the outset. Futures differ from
forward contracts in that they are standardised and traded on
recognised exchanges and rarely result in actual delivery; most
contracts are closed out prior to maturity by acquisition of an offsetting
position.
Glossary of terms
Geographical region - the numbers are reported by country of
operation of the obligor, except exposures to governments and
individuals which are shown by country of residence. The country of
operation is the country where the main operating assets of a legal
entity are held, or where its main cash flows are generated, taking
account of the entity’s dependency on subsidiaries' activities. Rest of
the World (RoW) includes exposures to supranationals and ocean-
going vessels.
Green House Gas emissions - GHGs are atmospheric gases that
absorb and emit radiation within the thermal infrared range and that
contribute to the greenhouse effect and global climate change. Many
different GHGs are produced as a result of human activities. The
seven gases mandated under the Kyoto Protocol and to be included in
national inventories under the United Nations Framework Convention
on Climate Change (UNFCCC)—carbon dioxide (CO2), methane
(CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs),
perfluorocarbons (PFCs), sulphur hexafluoride (SF), and nitrogen
trifluoride (NF3).
Guarantees - an agreement by a third party to cover the potential loss
to NatWest Group should a specified counterparty default on its
commitments.
Haircut - a downward adjustment to collateral value to reflect its nature
and any currency or maturity mismatches between the collateral and
the exposure it secures.
Hedge funds - pooled investment vehicles that are not widely available
to the public; their assets are managed by professional asset
managers who participate in the performance of the fund.
Impaired loans - all loans which are in default for which a Stage 3
impairment provision has been established either by way of individual
or modelled assessment.
Impairment losses - (a) for impaired financial assets measured at
amortised cost or FVOCI, impairment losses - the difference between
carrying value and the present value of estimated future cash flows
discounted at the asset's original effective interest rate - are
recognised in profit or loss and the carrying amount of the financial
asset reduced by establishing a provision (allowance) (b) for fair value
through P&L assets, the cumulative loss that had been recognised
directly in equity is removed from equity and recognised in profit or
loss as an impairment loss.
Income-producing real estate - comprises real estate exposures that
meet the following CRR criteria for specialised lending exposures: (i)
the exposure is to an entity that was created specifically to finance
and/or operate physical assets; (ii) the contractual arrangements give
the lender a substantial degree of control over the assets and the
income that they generate; and (iii) the primary source of repayment of
the obligation is the income generated by the assets being financed,
rather than the independent capacity of a broader commercial
enterprise. It therefore constitutes a sub-set of NatWest Group’s
overall exposure to commercial real estate.
Incremental risk charge (IRC) - the IRC model quantifies the impact of
rating migration and default events on the market value of instruments
with embedded credit risk (in particular, bonds and credit default
swaps) that are held in the trading book. It further captures basis risk
between different instruments, maturities and reference entities.
Interest rate risk - the risk that a position’s fair value will alter due to a
change in the absolute level of interest rates, in the spread between
two rates, in the shape of a yield curve or in any other interest rate
relationship.
Interest rate swap - a contract under which two counterparties agree to
exchange periodic interest payments on a predetermined monetary
principal, the notional amount.
Internal Capital Adequacy Assessment Process (ICAAP) - NatWest
Group’s own assessment of the total capital requirements of the Group
how it intends to mitigate those risks and how much current and future
capital is necessary having considered other mitigating factors.
Internal Liquidity Adequacy Assessment Process (ILAAP) – NatWest
Group's own assessment of its liquidity and funding risks , how it
intends to mitigate those risks and how much current and future
liquidity is necessary having considered other mitigating factors
Internal funding of trading business - the internal funding of the trading
book comprises net banking book financial liabilities that fund financial
assets in NatWest Group’s trading portfolios. Interest payable on these
financial liabilities is charged to the trading book.
Internal model method (IMM) - in the context of counterparty credit
risk, the IMM is the most risk-sensitive and sophisticated approach to
calculating EAD out of the three methods available under CRR. Under
the IMM firms may use their internal model which should be aligned to
the firm’s internal risk management practices. EAD is calculated as the
product of alpha and EPE.
International Accounting Standards Board (IASB) - the independent
standard-setting body of the IFRS Foundation. Its members are
responsible for the development and publication of International
Financial Reporting Standards (IFRSs) and for approving
Interpretations of IFRS as developed by the IFRS Interpretations
Committee.
International Swaps and Derivatives Association (ISDA) master
agreement - a standardised contract developed by ISDA for bilateral
derivatives transactions. The contract grants legal rights of set-off for
derivative transactions with the same counterparty.
Investment grade - generally represents a risk profile similar to a rating
of BBB-/Baa3 or better, as defined by independent rating agencies.
Key management - members of the NatWest Group Executive
Committee.
Level 1 - level 1 fair value measurements are derived from quoted
prices (unadjusted) in active markets for identical assets or liabilities
that the entity can access at the measurement date.
Level 2 - level 2 fair value measurements use inputs, other than
quoted prices included within level 1, that are observable for the asset
or liability, either directly or indirectly.
Level 3 - level 3 fair value measurements use one or more
unobservable inputs for the asset or liability.
Leverage ratio - a measure prescribed under Basel III. It is the ratio of
Tier 1 capital to total exposures. Total exposures include on-balance
sheet items, off-balance sheet items and derivatives, and generally
follow the accounting measure of exposure.
Liquidity and funding risk - the risk that NatWest Group is unable to
meet its financial liabilities when they fall due.
Liquidity coverage ratio (LCR) - the ratio of the stock of high quality
liquid assets to expected net cash outflows over the following 30 days.
High quality liquid assets should be unencumbered, liquid in markets
during a time of stress and, ideally, central bank eligible.
Glossary of terms
Loan impairment provisions –
IFRS 9 – loan impairment provisions are established on an expected
loss (forward looking) basis on financial assets. It has four
components: Individually assessed loan impairment provisions,
modelled Stage 3, modelled Stage 2 Lifetime ECL and modelled Stage
1-12 month ECL.
Loan:deposit ratio - net customer loans held at amortised cost divided
by total customer deposits
Loan-to-value ratio - the amount of a secured loan as a percentage of
the appraised value of the security e.g. the outstanding amount of a
mortgage loan as a percentage of the property's value.
Loans to Banks - amortised assets - Money lent by NatWest Group
and can include nostro/vostro accounts, reverse repurchase
agreements, notice balances with central banks, other loans and
amounts receivable under finance leases to a bank. These assets are
in a hold to collect business model whose aim is to solely collect
principal and interest in accordance with IFRS 9.
Loans to Customers - amortised assets - Money lent by NatWest
Group and can include mortgages , credit card receivables, other
loans , reverse repurchase agreements, and amounts receivable
under finance leases to a customers who are not banks. These assets
are in a hold to collect business model whose aim is to solely collect
principal and interest in accordance with IFRS 9.
London Interbank Offered Rate (LIBOR) - the benchmark interest rate
at which banks can borrow funds from other banks in the London
interbank market.
Loss given default (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 albeit with
conservatism and downturn assumptions generally removed.
L-SREP - an annual Liquidity Supervisory Review and Evaluation
Process with the PRA, that involves a comprehensive review of the
NatWest Group ILAAP, liquidity policies and risk management
framework.
Margin period of risk - the time period from the last exchange of
collateral covering a netting set of transactions with a defaulting
counterparty until that counterparty is closed out and the resulting
market risk is re-hedged.
Maximum distributable amount (MDA) - a restriction on distributions
which may be made by a bank which does not meet the combined
buffer requirements as set out in the PRA Supervisory Statement
SS6/14 ‘Implementing CRD IV: capital buffers’.
Minimum capital requirements (MCR) - the minimum amount of
regulatory capital that a financial institution must hold to meet the Pillar
1 requirements for credit, market and operational risk.
Minimum requirement for own funds and eligible liabilities (MREL) –
Tier 1 and Tier 2 capital plus specific loss absorbing instruments,
including senior notes, that may be used to cover certain gone concern
requirements in the EU.
Model risk - the risk that a model is specified incorrectly (not achieving
the objective for which it is designed), implemented incorrectly (an
error in translating the model specification into the version actually
used), or being used incorrectly (correctly specified but applied
inappropriately).
Model Risk Management - performs independent model validation for
material models where necessary.
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 effective interest rate (EIR) or
examples of modification events include forbearance and distressed
restructuring. The financial impact is recognised in the income
statement as an impairment release/(loss).
Mortgage-backed securities - asset-backed securities for which the
underlying asset portfolios are loans secured on property. See
Residential mortgage backed securities and Commercial mortgage
backed securities.
Multiple economic scenarios (MES) - Retail: the selection of a central
base case economic prediction, with two upside and two downside
scenarios around this point. Wholesale: uses the same base scenario
but adopts Monte simulations.
Net interest income - the difference between interest receivable on
financial assets classified as loans and receivables or available-for-
sale and interest payable on financial liabilities carried at amortised
cost.
Net interest margin (NIM) - net interest income of the banking business
as a percentage of interest-earning assets of the banking business.
Net stable funding ratio (NSFR) - the ratio of available stable funding
to required stable funding over a one year time horizon, assuming a
stressed scenario. Available stable funding includes items such as
equity capital, preferred stock with a maturity of over one year and
liabilities with an assessed maturity of over one year.
Netting - the process by which the value of assets taken from a given
counterparty is offset by the value of assets given to the same
counterparty, thereby reducing the exposure of one party to the other
to the difference between the two.
Net Zero Carbon - Term used by NatWest Group to describe a state
where no incremental greenhouse gases are added to the
atmosphere, with remaining emissions output being balanced by the
removal of carbon from the atmosphere.
Non-performing loans - loans classified as Stage 3 (IFRS 9). They
have a 100% probability of default and have been assigned an AQ10
internal credit grade.
Non-traded market risk - the risk to the value of assets or liabilities
outside the trading book, or the risk to income, that arises from
changes in market prices such as interest rates, foreign exchange
rates and equity prices, or from changes in managed rates.
Non-trading book - positions, exposures, assets and liabilities that are
not in the trading book. It is also referred to as “banking book”.
Operating expenses analysis – management view - the management
analysis of strategic disposals in other income and operating expenses
shows strategic costs and litigation and conduct costs in separate
lines. These amounts are included in staff, premises and equipment
and other administrative expenses in the statutory analysis.
Operational risk - the risk of loss resulting from inadequate or failed
internal processes, people and systems, or external events. It arises
from day-to-day operations and is relevant to every aspect of the
business.
Glossary of terms
Option - an option is a contract that gives the holder the right but not
the obligation to buy (or sell) a specified amount of an underlying
physical or financial commodity, at a specific price, at an agreed date
or over an agreed period. Options can be exchange-traded or traded
over-the-counter.
Over-the-counter (OTC) derivatives - derivatives with tailored terms
and conditions negotiated bilaterally, in contrast to exchange traded
derivatives that have standardised terms and conditions.
Own credit adjustment (OCA) - the effect of the NatWest Group’s own
credit standing on the fair value of financial liabilities.
Past due - a financial asset such as a loan is past due when the
counterparty has failed to make a payment when contractually due.
Pension risk - the risk caused by contractual or other liabilities to, or
with respect to, a pension scheme (whether established for its
employees or those of a related company or otherwise).
Pillar 1 - the part of CRD IV that sets out the process by which
regulatory capital requirements should be calculated for credit, market
and operational risk.
Pillar 2 - Pillar 2 is intended to ensure that firms have adequate capital
to support all the relevant risks in their business and is divided into
capital held against risks not captured or not fully captured by the Pillar
1 regulations (Pillar 2A) and risks to which a firm may become
exposed over a forward-looking planning horizon (Pillar 2B). Capital
held under Pillar 2A, in addition to the Pillar 1 requirements, is the
minimum level of regulatory capital a bank should maintain at all times
to cover adequately the risks to which it is or might be exposed, and to
comply with the overall financial adequacy rules. Pillar 2B is a capital
buffer which helps to ensure that a bank can continue to meet
minimum requirements during a stressed period, and is determined by
the PRA evaluating the risks to which the firm may become exposed
(e.g. due to changes to the economic environment) during the
supervisory review and evaluation process. All firms will be subject to
a PRA buffer assessment and the PRA will set a PRA buffer only if it
judges that the CRD IV buffers are inadequate for a particular firm
given its vulnerability in a stress scenario, or where the PRA has
identified risk management and governance failings, which the CRD IV
buffers are not intended to address.
Pillar 3 - the part of CRD IV that sets out the information banks must
disclose about their risks, the amount of capital required to absorb
them, and their approach to risk management. The aim is to
strengthen market discipline.
Point-in-time - an assessment of PD or a rating system based on a
view of a counterparty's current rather than future financial situation
given economic conditions. This differs from a through-the-cycle
approach, which considers performance over the duration of an
economic cycle.
Position risk requirement - a capital requirement applied to a position
treated under Part Three, Title 1, Chapter 3 (Market risk) as part of the
calculation of the market risk capital requirement.
Potential future exposure - is a measure of counterparty risk/credit risk.
It is calculated by evaluating existing trades done against the possible
market prices in future during the lifetime of the transactions.
Private equity - equity investments in operating companies not quoted
on a public exchange. Capital for private equity investment is raised
from retail or institutional investors and used to fund investment
strategies such as leveraged buyouts, venture capital, growth capital,
distressed investments and mezzanine capital.
Probability of default (PD) - 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.
Prudential Regulation Authority (PRA) - the statutory body responsible
for the prudential supervision of banks, building societies, insurers and
a small number of significant investment firms in the UK. The PRA is a
subsidiary of the Bank of England.
NatWest Group return on tangible equity excluding PPI and Alawwal
bank merger - Annualised profit for the period attributable to ordinary
shareholders, adjusted for the PPI charge, Alawwal bank merger and
FX recycling gain, for the period divided by average tangible equity.
Average tangible equity is total equity less intangible assets and other
owners’ equity.
Regulatory capital - the amount of capital that NatWest Group holds,
determined in accordance with rules established by the PRA for the
consolidated Group and by local regulators for individual Group
companies.
Repurchase agreement (Repo) - refer to Sale and repurchase
agreements.
Reputational risk - the threat to public image from a failure to meet
stakeholders’ expectations in relation to performance, conduct or
business profile. Stakeholders include customers, investors,
employees, suppliers, government, regulators, special interest and
consumer groups, media and the general public.
Re-securitisations - securitisations in which the underlying pools of
assets are themselves bonds issued by securitisation SSPEs.
Residential mortgage - a loan to purchase a residential property where
the property forms collateral for the loan. The borrower gives the
lender a lien against the property and the lender can foreclose on the
property if the borrower does not repay the loan per the agreed terms.
Also known as a home loan.
Residential mortgage backed securities (RMBS) - asset-backed
securities for which the underlying asset portfolios are residential
mortgages. NatWest Group RMBS classifications, including prime,
non-conforming and sub-prime, reflect the characteristics of the
underlying mortgage portfolios. RMBS are classified as prime RMBS
where the loans have low default risk and are made to borrowers with
good credit records and reliable payment histories and there is full
documentation. Non-conforming RMBS include US Alt-A RMBS,
together with RMBS in jurisdictions other than the US where the
underlying mortgages are not classified as either prime or sub-prime.
Classification of RMBS as subprime or Alt-A is based on Fair Isaac
Corporation (FICO) scores, level of documentation and loan-to-value
ratios of the underlying mortgage loans. US RMBS are classified as
sub-prime if the mortgage portfolio comprises loans with FICO scores
between 500 and 650 with full or limited documentation. Mortgages in
Alt-A RMBS portfolios have FICO scores of 640 to 720, limited
documentation and an original LTV of 70% to 100%. In other
jurisdictions, RMBS are classified as sub-prime if the mortgage
portfolio comprises loans with one or more high risk characteristics
such as: unreliable or poor payment histories; high loan-to-value
ratios; high debt-to-income ratio; the loan is not secured on the
borrower's primary residence; or a history of delinquencies or late
payments on the loan.
Glossary of terms
Residual maturity - the remaining time in years that a borrower is
permitted to take to fully discharge their contractual obligation
(principal, interest and fees) under the terms of a loan agreement.
Exposures are classified using maturity bands in line with contractual
maturity.
Return on equity - profit attributable to ordinary shareholders divided
by average shareholders’ equity as a percentage.
Return on tangible equity - annualised profit for the period attributable
to ordinary shareholders divided by average tangible equity. Average
tangible equity is total equity less intangible assets and other owners’
equity
Reverse repurchase agreement (Reverse repo) - refer to Sale and
repurchase agreements.
Risk appetite - an expression of the maximum level of risk that
NatWest Group is prepared to accept to deliver its business objectives.
Risk-weighted assets (RWAs) - assets adjusted for their associated
risks using weightings established in accordance with the CRD IV as
implemented by the PRA. Certain assets are not weighted but
deducted from capital.
RWA density - RWAs as a percentage of EAD post CRM.
Scope 1,2,3 emissions - Scope 1 covers direct GHG emissions from
owned or controlled sources. Scope 2 covers indirect GHG emissions
from the generation of purchased electricity, steam, heating and
cooling consumed by the reporting company. Scope 3 includes all
other indirect GHG emissions that occur in the value chain.
Securitisation - a process by which assets or cash flows are
transformed into transferable securities. The underlying assets or cash
flows are transferred by the originator or an intermediary, typically an
investment bank, to a structured entity which issues securities to
investors. Asset securitisations involve issuing debt securities (asset-
backed securities) that are backed by the cash flows of income-
generating assets (ranging from credit card receivables to residential
mortgage loans).
Securitisation position - refers to any exposures NatWest Group may
have to a securitisation. These include not only the securities issued
by an SSPE, but also loans, liquidity facilities and derivatives
transacted with an SSPE.
Securitised exposure - an asset, or a pool of assets, that has been
securitised, via either a traditional securitisation or a synthetic
securitisation. See traditional securitisation and synthetic securitisation
below.
Segmental return on tangible equity - annualised segmental operating
profit adjusted for tax and for preference share dividends divided by
average notional equity, allocated at an operating segment specific
rate, of the period average segmental risk-weighted assets
incorporating the effect of capital deductions (RWAes).
Settlement balances - payables and receivables that result from
purchases and sales of financial instruments recognised on trade date.
Asset settlement balances are amounts owed to NatWest Group in
respect of sales and liability settlement balances are amounts owed by
NatWest Group in respect of purchases.
Significant increase in credit risk (SICR) - a framework incorporating
both quantitative and qualitative measures aligned to the Group’s
current risk management framework has been established. Credit
deterioration will be a management decision, subject to approval by
governing bodies such as the Group Provisions Committee. The
staging assessment requires a definition of when a SICR has
occurred; this moves the loss calculation for financial assets from a 12
month horizon to a lifetime horizon. Management has established an
approach that is primarily informed by the increase in lifetime
probability of default, with additional qualitative measures to account
for assets where PD does not move, but a high risk factor is
determined.
Standardised approach - a method used to calculate credit risk capital
requirements under Pillar 1. In this approach the risk weights used in
the capital calculation are determined by regulators. For operational
risk, capital requirements are determined by multiplying three years’
historical gross income by a percentage determined by the regulator.
The percentage ranges from 12 to 18%, depending on the type of
underlying business being considered.
Stress testing - a technique used to evaluate the potential effects on
an institution’s financial condition of an exceptional but plausible event
and/or movement in a set of financial variables.
Stressed value-at-risk (SVaR) - a VaR measure using historical data
from a one year period of stressed market conditions. For the
purposes of calculating regulatory SVaR, a time horizon of ten trading
days is assumed at a confidence level of 99%. Refer also to Value-at-
risk below.
Structured entity (SE) - 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.
Subordinated liabilities - comprise of liabilities in respect of which
there is a contractual obligation that, in the event of winding up or
bankruptcy, they are to be repaid only after the claims of other
creditors have been met'. This include all subordinated liabilities,
whether or not a ranking has been agreed between the subordinated
creditors concerned.
Supervisory slotting approach - a method of calculating regulatory
capital, specifically for lending exposures in project finance and
income producing real estate, where the PD estimates do not meet the
minimum internal ratings based standards. Under this approach,
NatWest Group classifies exposures from 1 to 5, where 1 is strong and
5 is default. Specific risk-weights are assigned to each classification.
Tangible net asset value (TNAV) - tangible equity divided by the
number of ordinary shares in issue. Tangible equity is ordinary
shareholders’ interest less intangible assets.
Through-the-cycle – PD models that reflect a long run average view of
default levels. Also refer to point-in-time.
Tier 1 capital - a component of regulatory capital, comprising Common
Equity Tier 1 and Additional Tier 1. Additional Tier 1 capital includes
eligible non-common equity capital securities and any related share
premium. Under Basel III, Tier 1 capital comprises Core Tier 1 capital
plus other Tier 1 securities in issue, less certain regulatory deductions.
Tier 2 capital - qualifying subordinated debt and other Tier 2 securities
in issue, eligible collective impairment provisions less certain
regulatory deductions.
Traded market risk - the risk arising from changes in fair value on
positions, assets, liabilities or commitments in trading portfolios as a
result of fluctuations in market prices.
Glossary of terms
Trading assets - A financial asset that is acquired or
incurred principally for the purposes of selling or repurchasing it in the
near term: on initial recognition is part of a portfolio of identified
financial instruments that are managed together and for which there is
evidence of a recent actual pattern of short-term profit taking.
Derivative assets are shown separately on the balance sheet.
Trading book - a trading book consists of positions in financial
instruments and commodities held either with the intent to trade, or in
order to hedge other elements of the trading book. To be eligible for
trading book capital treatment, financial instruments must either be
free of any restrictive covenants on their tradability, or able to be
hedged.
Trading liabilities - A financial liability that is acquired or
incurred principally for the purposes of selling or repurchasing it in the
near term: on initial recognition is part of a portfolio of identified
financial instruments that are managed together and for which there is
evidence of a recent actual pattern of short-term profit taking.
Derivative liabilities are shown separately on the balance sheet.
Traditional securitisation - securitisation in which the originator
transfers ownership of the underlying exposure(s) to an SSPE, putting
the asset(s) beyond the reach of the originator and its creditors.
Undrawn commitments - assets/liabilities that have been committed
but not yet transacted. In terms of credit risk, these are obligations to
make loans or other payments in the future.
Value-at-risk (VaR) - a technique that produces estimates of the
potential loss in the market value of a portfolio over a specified time
period at a given confidence level.
Wholesale funding - wholesale funding comprises Deposits by banks,
Debt securities in issue and Subordinated liabilities.
Write-down - a reduction in the carrying value of an asset to record a
decline in its fair value or value in use.
Write-off – a reduction in the value of an asset when there is no
realistic prospect of recovery.
Wrong-way risk - the risk of loss when the risk factors driving the
exposure to a counterparty or customer are positively correlated with
the creditworthiness of that counterparty i.e. the size of the exposure
increases at the same time as the risk of the counterparty or customer
being unable to meet that obligation, increases.