RBS 2006 Annual Report Download - page 82
Download and view the complete annual report
Please find page 82 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.81
RBS Group • Annual Report and Accounts 2006
Operating and financial review
Credit risk
Key principles of credit risk management
The objective of credit risk management is to enable the Group
to achieve appropriate risk versus reward performance whilst
maintaining credit risk exposure in line with approved risk
appetite.
Group Risk Management is responsible for setting standards
for credit risk management throughout the Group. This is
achieved via a combination of governance structures, credit
risk policies, control processes and credit systems collectively
known as the Group’s Credit Risk Management Framework
(“CRMF”). The framework is defined in detail in the Group’s
‘Principles for Managing Credit Risk’.
The key principles for credit risk management as defined in the
CRMF are set out below.
•Approval of all credit exposure is granted prior to any
advance or extension of credit.
•An appropriate credit risk assessment of the customer and
credit facilities is undertaken prior to approval of credit
exposure. This includes a review of, amongst other things,
the purpose of the credit and sources of repayment,
compliance with affordability tests, repayment history,
capacity to repay, sensitivity to economic and market
developments and risk-adjusted return.
•The Board delegates authority to Advances Committee,
Group Credit Committee and divisional credit committees.
•Credit risk authority is specifically granted in writing to all
individuals involved in the granting of credit approval,
whether this is exercised personally or collectively as part of
a credit committee. In exercising credit authority, the
individuals act independently.
•Where credit authority is exercised personally, the individual
has no responsibility or accountability for related business
revenue generation.
•All credit exposures, once approved, are effectively
monitored and managed and reviewed periodically against
approved limits. Lower quality exposures are subject to a
greater frequency of analysis and assessment.
•Customers with emerging credit problems are identified early
and classified accordingly. Remedial actions are implemented
promptly to minimise the potential loss to the Group.
•Portfolio analysis and reporting is used to identify and manage
credit risk concentrations and credit risk quality migration.
Each Division has established its own CRMF consistent with
the Group CRMF. Divisional credit departments are responsible
for maintaining the CRMF and ensuring that asset quality is
within specified parameters. Divisional credit departments are
independent of business management and have no direct
responsibility or accountability for revenue generation. This
independence is supported by the divisional head of credit
having dual reporting lines to both the divisional CEO (via the
divisional Chief Risk Officer) and to the Head of Group Credit
Risk.
GRM undertakes regular assessments of the effectiveness
of each divisional CRMF to ensure it complies with Group
standards and is appropriate for the business being
undertaken. GRC and the GEMC review reports on the Group’s
portfolio of credit risks on a monthly basis.
Credit approval process
Different credit approval processes exist for each customer
type in order to ensure appropriate skills and resources are
employed in credit assessment and approval whilst following
the key principles relating to credit approval.
Wholesale risk exposures are aggregated to determine the
appropriate level of credit approval required and to facilitate
consolidated credit risk management.
Credit authority is not extended to relationship managers:
•Assessments of corporate borrower and transaction risk are
undertaken using a range of credit risk models supplemented,
where appropriate, by management judgement. Specialist
internal credit risk departments independently oversee the
credit process and make credit decisions or
recommendations to the appropriate credit committee.
•Financial Markets counterparties are subject to similar
modelling techniques but are approved by a dedicated credit
function which specialises in traded market product risk.
Consumer lending and personal businesses employ 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 are individually
assessed.