RBS 2006 Annual Report Download - page 81
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Please find page 81 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
80
Operating and financial review continued
Operating and financial review
Risk management
The principal risks that the Group manages are as follows:
• Credit risk: is the risk arising from the possibility that the
Group will incur losses from the failure of customers to meet
their obligations.
• Liquidity risk: is the risk that the Group is unable to meet its
obligations as they fall due.
• Market risk: the Group is exposed to market risk because of
positions held in its trading portfolios and its non-trading
businesses.
• Insurance risk: the Group is exposed to insurance risk, either
directly through its businesses or through using insurance as
a tool to mitigate other risk exposures.
• Operational risk: is the risk arising from the Group’s people,
processes, systems, physical assets and external events.
• Regulatory risk: is the risk arising from failing to meet the
requirements and expectations of our many regulators, or
from a failure to address or implement any change in these
requirements or expectations.
Risk appetite
Risk management across the Group is based on the risk
appetite and philosophy set by the Board and the associated
risk committees. The Board establishes the parameters for risk
appetite for the Group through:
•Setting strategic direction.
•Contributing to, and ultimately approving annual plans for the
Group and each division.
•Regularly reviewing and monitoring the Group’s performance
in relation to risk through monthly Board Reports.
The Board delegates the articulation of risk appetite to GEMC
and ensures that this is in line with the strategy and the desired
risk reward trade off for the Group. Risk appetite is an
expression of the maximum level of residual risk that the
Group is prepared to accept in order to deliver its business
objectives and is assessed against regular (often daily)
controls and stress testing to ensure that the limits are not
compromised in abnormal circumstances.
Risk appetite is usually defined in both quantitative and
qualitative terms. Whilst different techniques are used to
ensure that the Group’s risk appetite is achieved, generically
they can be classified as follows:
•Quantitative: encompassing stress testing, risk concentration,
value at risk and credit related metrics, including the
probability of default, loss given default and exposure
at default.
•Qualitative: focusing on ensuring that the Group applies the
correct principles, policies and procedures.
The annual business planning and performance management
process and associated activities ensure the expression of risk
appetite remains appropriate. GRC and GALCO support this
work.
Risk organisation
Divisional Chief Executive Officers (CEOs) are specifically
responsible for the management of risk within their divisions.
As such, they are responsible for ensuring that they have
appropriate risk management frameworks that are adequate in
design, effective in operation and meet minimum Group
standards.
Divisional CEOs are supported by divisional Chief Risk
Officers (CROs) and Chief Financial Officers (CFOs). An
important element that underpins the Group’s approach to the
management of all risk is independence. In the case of CROs,
it is enforced by joint reporting lines, both operationally to the
divisional CEO and functionally to the Group Chief Risk Officer.