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Notes to the accounts
47 Fair values of financial instruments

Financial instruments include both financial assets and financial liabilities and also derivatives. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.

Wherever possible, the Group has estimated fair value using market prices or data available for instruments with characteristics either identical or similar to those of the instruments held by the Group. In certain cases, however, including loans and advances to customers, no ready markets currently exist in the UK wherein exchanges between willing parties occur. Accordingly, various techniques have been developed to estimate what the approximate fair value of such instruments might be.

These estimation techniques are necessarily subjective in nature and involve several assumptions. There have been no significant changes in the estimation techniques or the methodology used compared with that used at 31st December 1999 with the exception of the methods employed to calculate the fair value of loans and advances to customers, as described in note (d)to the following table.

Because a variety of estimation techniques are employed and significant estimates made, comparisons of fair values between financial institutions may not be meaningful. Readers of these accounts are thus advised to use caution when using this data to evaluate the Group’s financial position.

Fair value information is not provided for items that do not meet the definitions of a financial instrument. These items include short terms debtors and creditors, intangible assets such as the value of the Group’s branch network, the long-term relationships with depositors (core deposit intangibles), premises and equipment and shareholders’ equity. These items are material and accordingly the fair value information presented does not purport to represent, nor should it be construed to represent, the underlying value of the Group as a going concern at 31st December 2000.

The following table shows the carrying amount and the fair value of the Group’s financial instruments analysed between trading and non-trading assets and liabilities.

Note 2000
Carrying
amount
£m		 2000
Fair
value
£m		 1999
Carrying
amount
£m		 1999
Fair
value
£m
Trading
 
Assets
Treasury bills and other eligible bills (a) 2,623 2,623 2,665 2,665
Loans and advances to banks
(including reverse repurchase agreements) (a) 26,856 26,856 26,555 26,555
Loans and advances to banks
(including reverse repurchase agreements) (a) 23,687 23,687 21,562 21,562
Debt securities (a) 32,402 32,402 23,755 23,755
Equity shares (a) 3,818 3,818 5,425 5,425
Derivatives (see analysis in note 46) (b) 12,100 12,100 13,390 13,390
London Metal Exchange warrants and other metals (a) 1,001 1,001 331 331
trading positions (see note 25)
 
Liabilities
Deposits by Banks and customers accounts
(including repurchase agreements) (a) 35,927 35,927 36,510 36,510
Short positions in securities (see note 31) (a) 21,201 21,201 16,813 16,813
Derivatives (see analysis in note 46) (b) 11,971 11,971 13,619 13,619
Non trading
 
Assets
Cash and balances at central banks (a) 1,243 1,243 1,166 1,166
Items in course of collection from other banks (a) 2,509 2,509 2,492 2,492
Treasury bills and other eligible bills (a) 2,941 2,941 4,511 4,511
Loans and advances to banks (c) 9,570 9,600 13,071 13,100
Loans and advances to customers (d) 138,423 139,000 95,006 95,800
Debt securities (e) 38,368 38,719 30,164 30,196
Equity shares (e) 244 295 179 206
Derivatives (see analysis in note 46) (b) 1,805 3,140 1,008 1,228
 
Liabilities
Deposits by Banks and customers accounts (f ) 172,797 172,700 131,942 131,900
Debt securities in issue (g) 31,883 31,971 23,329 23,334
Items in course of collection due to other banks (a) 1,176 1,176 1,400 1,400
Undated loan capital (h) 2,672 2,661 1,749 1,669
Dated loan capital (h) 3,698 3,698 2,848 2,869
Non-equity minority and other interests and shareholders’ funds (i ) 1,492 1,554 270 277
Derivatives (see analysis in note 46) (b) 937 2,226 658 1,212
Notes:
(a) Financial assets and financial liabilities where fair value approximates carrying value because they are either (i) carried at market value or (ii) have minimal credit losses and are either short-term in nature or repriced frequently.

(b) Derivatives held for trading purposes are carried at fair value. Derivatives held for non-trading purposes are accounted for in accordance with the accounting treatment of the underlying transaction or transactions being hedged. The fair value of these instruments is estimated using market prices or pricing models consistent with the methods used for valuing similar instruments used for trading purposes.

(c) Within this calculation, the fair value for placings to banks was estimated using discounted cash flows, applying either market rates, where practicable, or rates currently offered by other financial institutions for placings with similar characteristics.

(d) The Group provides lending facilities of varying rates and maturities to corporate and personal customers. In estimating the fair value of such instruments, the fair value of personal and corporate loans subject to variable interest rates is considered to approximate the carrying value, in view of the unrestricted ability to prepay. The fair value of such instruments subject to fixed interest rates was estimated by discounting cash flows at appropriate rates and making adjustments for credit risks, servicing costs and cost of capital.

(e) The valuation of listed securities and investments is at mid-market prices and that of unlisted securities and investments is based on the Directors’ estimate, which takes into consideration discounted cash flows, price earnings ratios and other suitable valuation techniques.

(f ) Fair values of deposit liabilities payable on demand (interest free, interest bearing and savings deposits) approximate to their carrying value. The fair value of all other deposits and other borrowings was estimated using discounted cash flows, applying either market rates, where practicable, or rates currently offered by the Group for deposits of similar remaining maturities.

(g) Fair values of short-term debt securities in issue are approximately equal to their carrying amount. Fair values of other debt securities in issue are based on quoted prices where available, or where these are unavailable, are estimated using other valuation techniques.

(h) The estimated fair values for dated and undated convertible and non-convertible loan capital were based upon quoted market rates for the issue concerned or equivalent issues with similar terms and conditions.

(i) The fair value of non-equity minority and other interests and shareholders’ funds was calculated using quoted market