RBS 2004 Annual Report Download - page 106

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Operating and financial review
Operating and financial review continued
Liquidity risk
Liquidity management within the Group focuses on both overall
balance sheet structure and the control, within prudent limits,
of risk arising from the mismatch of maturities across the balance
sheet and from undrawn commitments and other contingent
obligations.
The management of liquidity risk within the Group is undertaken
within limits and other policy parameters set by GALCO, who
review monthly and receive, on an exception basis, reports
detailing compliance with those policy parameters. A weekly
report is also provided to the GEMC. Compliance is monitored
and co-ordinated daily under the stewardship of the Group
Treasury function, both in respect of internal policy and the
regulatory requirements of the FSA. Detailed liquidity position
reports are compiled each day by Group Treasury and reviewed
daily and weekly with Financial Markets, who manage day-to-day
and intra-day market execution within the policy parameters set.
In addition to their consolidation within the Group’s daily
liquidity management process, it is also the responsibility of all
Group subsidiaries and branches outside the UK to ensure
compliance with any separate local regulatory liquidity
requirements where applicable.
The structure of the Group’s balance sheet is managed to
maintain substantial diversification, to minimise concentration
across its various deposit sources, and to contain the level of
reliance on total and net short-term wholesale sources of
funds within prudent levels.
The short-term maturity structure of the Group’s assets and
liabilities is also managed on a daily basis to ensure that
contractual cash flow obligations, and potential cash flows
arising from undrawn commitments and other contingent
obligations, can be met as they arise from day to day, either
from cash inflows from maturing assets, new borrowing or the
sale or repurchase of debt securities held.
Short-term liquidity risk is managed on a consolidated basis for
the whole Group excluding the activities of Citizens and insurance
businesses, which are subject to regulatory regimes that
necessitate the separate management of liquidity.
Internal liquidity mismatch limits are set for all other subsidiaries
and non-UK branches which have material local treasury
activities in external markets, to ensure those activities do not
compromise daily maintenance of the Group’s overall liquidity
risk position within the Group’s policy parameters.
The level of large deposits taken from banks, corporate
customers, non-bank financial institutions and other customers
and significant cash outflows therefrom are also reviewed to
monitor concentrations and identify any adverse trends.
The degree of maturity mismatch within the overall long-term
structure of the Group’s assets and liabilities is also managed
within internal policy limits, to ensure that term asset commitments
may be funded on an economic basis over their life. In
managing its overall term structure, the Group analyses and
takes into account the effect of retail and corporate customer
behaviour on actual asset and liability maturities where they
differ materially from the underlying contractual maturities.
The Group also periodically undertakes stress tests and
sensitivity analysis to analyse the potential impact on its
liquidity risk. Contingency plans are maintained to anticipate
and respond to any approaching or actual material
deterioration in market conditions.