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Notes to the Bank financial statements continued
For the year ended 31 December 2013
All amounts are stated in £m unless otherwise indicated
29. Customer accounts – capital bonds
In plain english:
We hold customers’ savings in the form of capital bonds upon which we pay out returns that are linked to stock market performance. The Bank uses
derivatives to control the cost of this funding (recorded as interest expense in the Bank income statement) by hedging stock market risk.
2013 2012
Retail 538.1 888.1
Capital bonds are fixed term customer accounts with returns based on the movement in an index (eg FTSE 100) over the term of the bond.
The capital bonds have been designated on initial recognition at fair value through income and expense and are carried at fair value.
The fair values for the capital bonds are obtained on a monthly basis from the swap counterparties. These external valuations are reviewed independently using
valuation software to ensure the fair values are priced on a consistent basis. None of the change in the fair value of the capital bonds is attributable to changes
in the liability’s credit risk.
The maximum amount the Bank would contractually be required to pay at maturity for all the capital bonds is £539.2m (2012: £888.7m).
The Bank uses swaps to create economic hedges against all of its capital bonds. The gain on capital bonds in the income statement for the year is
£21.3m (2012: £33.0m). However, taking into account changes in fair value of the associated swaps, the net impact to the income statement for the year
is a gain of £0.9m (2012: £0.1m).
30. Debt securities in issue
In plain english:
This note gives you more information on our debt securities (bonds and similar instruments) used as part of our wholesale funding programme. The majority
are bonds with a variety of fixed and variable interest rates which we use to fund mortgages.
2013 2012
Certificates of deposit 5.1 157.8
Commercial paper – 8.2
Fixed and floating rate notes 4,190.2 4,547.7
4,195.3 4,713.7
The Bank has entered into cross currency interest rate swaps that protect it from changes in exchange rates and interest rates on its debt securities in issue.
Changes in the fair values of these swaps are largely offset by changes in the sterling equivalent carrying value of the debt securities in issue.
Debt securities in issue include fixed and floating rate notes, the majority of which are secured on portfolios of variable and fixed rate mortgages. Certain of
these notes (securitisations) are redeemable in part from time to time, such redemptions being limited to the net capital received from mortgagors in respect
of the underlying assets. There is no obligation for the Bank to make good any shortfall out of general funds. Other notes (covered bonds – secured, certificates
of deposit and euro medium term notes – unsecured) require the Bank to repay contractual amounts due on specified maturity dates.
The Co-operative Bank plc Annual report and accounts 2013
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