RBS 2006 Annual Report Download - page 182
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Please find page 182 of the 2006 RBS annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.RBS Group • Annual Report and Accounts 2006 181
Financial statements
•Loss given default (“LGD”) – these models estimate the
economic loss that may be suffered by the Group on a credit
facility in the event of default. The LGD of a facility represents
the amount of debt which cannot be recovered and is
typically expressed as a percentage of the EAD. The Group’s
LGD models take into account the type of borrower, facility
and any risk mitigation such as security or collateral held. The
LGD may also be affected by the industry sector of the
borrower, the legal jurisdiction in which the borrower operates
as well as general economic conditions which may impact the
value of any assets held as security.
•Credit risk exposure measurement – these models calculate
the credit risk exposure for products where the exposure is
not 100% of the gross nominal amount of the credit
obligation. These models are most commonly used for
derivative and other traded instruments where the amount of
credit risk exposure may be dependent on external variables
such as interest rates or foreign exchange rates.
Credit risk assets
Credit risk assets are an internal risk measure of the Group’s
exposure to customers. These consist of loans and advances
(including overdraft facilities), instalment credit, finance lease
receivables, debt securities and other traded instruments.
Credit risk asset quality
Internal reporting and oversight of risk assets is principally
differentiated by credit ratings. Internal ratings are used to
assess the credit quality of borrowers. Customers are
assigned credit ratings, based on various credit grading
models that reflect the probability of default. All credit ratings
across the Group map to a Group level asset quality scale.
Provision analysis
The Group’s consumer portfolios, which consist of small value,
high volume credits, have highly efficient, largely automated
processes for identifying problem credits and very short
timescales, typically three months, before resolution or
adoption of various recovery methods.
Corporate portfolios consist of higher value, lower volume
credits, which tend to be structured to meet individual
customer requirements. Provisions are assessed on a case by
case basis.
Early and active management of problem exposures ensures
that credit losses are minimised. Specialised units are used for
different customer types to ensure that appropriate risk
mitigation is taken in a timely manner.
Portfolio provisions are reassessed regularly as part of the
Group’s ongoing monitoring process.
Provisions methodology
Provisions for impairment losses are assessed under three
categories as described below:
Individually assessed provisions are the provisions required for
individually significant impaired assets which are assessed on a
case-by-case basis, taking into account the financial condition
of the counterparty and any guarantor. This incorporates an
estimate of the discounted value of any recoveries and
realisation of security or collateral. The asset continues to be
assessed on an individual basis until it is repaid in full,
transferred to the performing portfolio or written-off.
Collectively assessed provisions are the provisions on impaired
credits below an agreed threshold which are assessed on a
portfolio basis, to reflect the homogeneous nature of the assets,
such as credit cards or personal loans. The provision is
determined from a quantitative review of the relevant portfolio,
taking account of the level of arrears, security and average
loss experience over the recovery period.
Latent loss provisions are the provisions held against the
estimated impairment in the performing portfolio which has yet
to be identified as at the balance sheet date. To assess the
latent loss within the portfolio, the Group has developed
methodologies to estimate the time that an asset can remain
impaired within a performing portfolio before it is identified and
reported as such.
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. It is undertaken within limits and other policy
parameters set by Group Asset and Liability Management
Committee (GALCO).
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 short-term wholesale sources of funds within
prudent levels.
The degree of maturity mismatch within the overall long-term
structure of the Group’s assets and liabilities is managed within
internal policy guidelines, 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 short-term maturity structure of the Group’s liabilities and
assets is managed on a daily basis to ensure that all material
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.