RBS 2003 Annual Report Download - page 95

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Annual Report and Accounts 2003
Operating and financial review
Credit risk
Credit risk is the risk arising from the possibility that the Group
will incur losses from the failure of customers to meet their
obligations.
The credit risk framework
The management of credit risk is undertaken within an agreed
and regulated Credit Risk Framework which is defined in the
Group’s ‘Principles for Managing Credit Risk’. These set out
minimum standards for managing credit risk including principles
for maintaining the credit risk framework, approving credit risk
taken by the Group, credit stewardship and reviewing the
effectiveness of the credit culture. These standards are used
to manage the Group’s portfolio of risk assets.
All credit risk exposures require approval by authorised
individuals or credit committees, independent of business
revenue generation. Existing credit risk exposures are
monitored and reviewed periodically against approved risk
limits. Review occurs at least annually with the lower quality
exposures being subject to greater frequency of analysis and
assessment. Exposures below specified thresholds and
meeting specific criteria can be approved through authorised
largely automated processes.
Different credit approval processes exist for each customer
type in order to ensure appropriate skills and resources are
employed in credit assessment and approval. Risk exposures
are aggregated to determine the appropriate level of credit
approval required and to facilitate consolidated credit risk
management:
•Retail and personal businesses employ market best practice
credit scoring techniques to process small scale, large volume
credit decisions. Insights from such systems are combined
with management judgement to ensure an effective ongoing
process of approval, review and enhancement. Credit
decisions for loans above specified thresholds, including
lending to SMEs, are individually assessed.
•Corporate businesses are assessed using the judgement of
the relationship managers, supported by an independent
internal dedicated analysis team. A range of risk rating
models have been developed to facilitate risk assessments
for both borrower and transaction risk. Specialist internal
credit risk departments independently oversee the credit
process and make decisions or recommendations to the
appropriate credit committee. Credit authority is not
extended to relationship managers.
•Financial Markets counterparties are approved by a
dedicated credit function, with expertise in traded market
product risk and which also specialises in the analysis and
assessment of financial market counterparties.
GRM and the GEMC review the reports on the Group’s
portfolio of credit risks on a monthly basis.