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RBS Group • Annual Report and Accounts 2006
Operating and financial review
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, which reviews monthly, and receives on an exception
basis, reports detailing compliance with those policy
parameters. A weekly report is also provided to the Group’s
executive management. 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 Financial Services Authority.
Detailed liquidity position reports are compiled each day by
Group Treasury and reviewed daily and weekly with Global
Banking & 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, subject to Group Treasury oversight.
Diversification of funding sources
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 (gross
and net of repos) within prudent levels. As part of the Group’s
planning process, the forecast structure of the balance sheet
is regularly reviewed over the plan horizon and funding
strategies and options are developed by Group Treasury and
implemented after review and approval by GALCO.
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 concentration and identify any adverse trends. During
2006 the Group’s funding sources remained well diversified by
counterparty, instrument and maturity.
2006 2005 2004
Sources of funding £m % £m % £m %
Customer accounts (excluding repos)
Repayable on demand 197,771 28 172,853 27 169,016 32
Time deposits 122,467 17 121,260 19 72,165 14
Total customer accounts (excluding repos) 320,238 45 294,113 46 241,181 46
Debt securities over one year remaining maturity 44,006 6 22,293 3 9,931 2
Subordinated liabilities 27,654 4 28,274 4 20,366 4
Shareholders’ equity 40,227 6 35,435 6 33,905 6
432,125 61 380,115 59 305,383 58
Debt securities up to one year remaining maturity 41,957 5 68,127 11 54,068 10
Repo agreements with customers 63,984 9 48,754 7 42,134 8
Deposits by banks (excluding repos) 55,767 8 62,502 10 56,541 11
Repo agreements with banks 76,376 11 47,905 7 43,342 8
Short positions 43,809 6 37,427 6 28,923 5
Total 714,018 100 644,830 100 530,391 100
Customer accounts (excluding repos), term debt securities of
over one year remaining maturity and capital continue to
represent the core of the Group’s funding. These core funds in
total increased by £52.0 billion (14%) over the course of 2006
and represent 61% of total funding excluding other liabilities at
31 December 2006.
Customer accounts continue to provide a substantial
proportion of the Group’s funding and comprise a well
diversified and stable source of funds from a wide range of
retail, corporate and non-bank institutional customers.
Excluding repo agreements, customer accounts grew by
£26.1 billion (9%), and represent 45% of total funding
excluding other liabilities at 31 December 2006.
Term debt securities with an outstanding term of over one year
increased £21.7 billion (97%) to represent 6% of the Group’s
funding at 31 December 2006, reflecting the activity of the
Group in raising term funds through its securitisation and Euro
and US Medium Term Note programmes.
Capital (shareholders’ equity and subordinated debt) increased
by £4.2 billion (7%) and provides 10% of total funding
excluding other liabilities.