RBS 2004 Annual Report Download - page 99

section
01
97
Annual Report and Accounts 2004
Operating and financial review
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, defining and
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 credit 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. Corporate 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. Scores 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.
•Assessments of corporate borrower and transaction risk are
undertaken using a range of credit rating models
supplemented by the judgement of relationship managers.
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 which specialises in the traded
market product risk.
GRM and the GEMC review the reports on the Group’s
portfolio of credit risks on a monthly basis.