Response to consultation on draft Regulatory Technical Standards on valuation

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Question 2: Should specific types of information be required on deviations from management assumptions, for example on differences in expected cash flows and/or the discount rates?

We agree that, where fundamental assumptions have changed, it is reasonable to expect these to be explicitly identified in communication with the market and other stakeholders. However, we would suggest that these are not made overly specific otherwise banks may be forced to disclose information that is irrelevant.

Question 3: Would you add, amend, or remove any areas which are likely to be subject to significant valuation uncertainty?

We agree that by wording in the form “likely to include, but not limited to”, means that this does not have to be a comprehensive list. “Deferred Tax” and “Pensions” are other areas that could be added further examples

Question 4: Should the buffer instead always be greater than zero? If yes, how should the buffer be determined?

We consider that, in the absence of facts and circumstances supporting the existence of additional losses, the buffer shall have a value of zero. If the valuations impose sufficient additional discount, especially with regard to the exit valuation, then no additional buffer would be appropriate. The provisional valuation should provide clarity where subjective judgement has been used, and the basis for approximating any discount.

Question 5: Do you agree that a valuation of post-conversion equity is necessary to inform decision on the terms of write-down or conversion?

Yes, the equity value, being an estimate of the market price for those shares that would result from generally accepted valuation methodologies informing the determination of the conversion rate or rates, is necessary to assure all holders of converted instruments of fair and equitable treatment.

Question 6: Do you agree with the definition of equity value for this purpose in Article 2 (i)? If not, what changes should be made to the definition? Should the definition be more closely linked to the net asset value determined on the basis of the remainder of valuation 2 adjusted for goodwill/’badwill’, and if so how should that adjustment be estimated?

See response to Q1(i).

We expect that in the event of resolution, there will be considerable uncertainty and the “assessed market price” could be influenced heavily by illiquidity in the market. As a result of this we believe that market value would be very challenging to estimate and the reliability of valuations could be called into question.

Question 7: As an alternative, should the use of information that becomes available after the resolution date be more restricted, and in particular permitted only if it refers to facts and circumstances existing at the resolution date which could reasonably have been known at that date?

We agree that only contemporaneous evidence which might reasonably be expected to be available to the valuer should be considered. Information should only be permitted if it refers to facts and circumstances existing at the resolution date which could reasonably have been known at that date

Question 8: Should the use of information available after the resolution date be further limited, for example by requiring that such information is only used if it results in a significant change in the values of the entity’s assets or liabilities?

We agree but there needs to be a definition of what constitutes ‘significant change’.

Question 9: Should these technical standards provide further detail on the characteristics of appropriate discount rates?

We believe the technical standards should provide further guidance to ensure that valuers and users of the information have clarity as to how the discount rates have been derived but that this should avoid prescribing an approach that might diminish in relevance overtime. It is important that rates are derived consistently within a jurisdiction and the RTS should consider including reference to where this mandate currently exists within a competent authority as it does in the UK through HMT.

Question 10: Are there any changes you would suggest to the methodology for determining actual treatment of shareholders and creditors in resolution? In particular, should the methodology for valuing equity be further specified and, if so, what should be included in that specification (whether additional detail on the current approach, or a different approach, linked for example to net asset values adjusted for goodwill/badwill)?

No comments to make.

Question 11: Should the valuer be required to accompany the comparison envisaged in Article 7 of this Regulation with additional relevant disclosures? If yes, what should those be (for example, documentation of any differences between the valuation of actual treatment and the market price that would be observed for those same claims were they traded in an active market)?

Yes, each creditor bailed in requires evidence of fair process and valuation. The valuer needs to have a prescribed set of valuations and accompanying disclosures to be provided, so that the expectations of creditors are met without favour.

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Name of organisation

The Royal Bank of Scotland Group plc