RBS 2006 Annual Report Download - page 95
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RBS Group • Annual Report and Accounts 2006
94
Operating and financial review continued
Operating and financial review
(ii) Stress testing
Stress testing measures the impact of abnormal changes in
market rates and prices on the fair value of the Group’s trading
portfolios. GEMC approves the high-level market risk stress test
limit for the Group.
The Group calculates a range of market risk stress tests each
day. The objective of stress testing is to identify the loss that
the Group’s current portfolio of trading book exposures would
generate in plausible but adverse market events. The Group
calculates historical stress tests and hypothetical stress tests.
Historical stress tests calculate the loss that would be
generated if the market movements that occurred during a
historical market event were to be repeated. Hypothetical
stress tests calculate the loss that would be generated if a
specific set of adverse market movements were to occur.
In addition to the Group-level consolidated market risk stress
tests, stress testing is also undertaken at key trading strategy
level. Additional stress tests are undertaken for those strategies
where the associated market risks are not adequately captured
by VaR.
Stress test exposures are discussed with senior management
and are reported to GRC, GEMC and the Board. Breaches in
the Group’s market risk stress testing limit are reported to GEMC.
(iii) Position risk and sensitivity analyses
In addition to the VaR and stress testing measures discussed
above, the Group calculates a wide range of sensitivity and
position risk measures, for example interest rate ladders or
option revaluation matrices. These measures provide valuable
additional controls, often at individual desk or strategy level.
0
5
10
15
20
25
30
35
40
< (4)
(4) > <(2)
(2) > <0
0 > <2
2 > <4
4 > <6
6 > < 8
8 > < 10
10 > < 12
12 > < 14
14 > < 16
16 > < 18
18 > < 20
20 > < 22
22 > < 24
24 > < 26
26 > < 28
28 > < 30
30 > < 32
32 > < 34
34 > < 36
36 > < 38
38 > < 40
40 > < 42
42 > < 44
44 > < 46
46 > < 48
> 48
Number of trading days
Trading income (£m)
Backtesting
The Group undertakes a programme of daily backtesting,
which compares the actual profit or loss realised in trading
activity to the VaR estimation. The results of the backtesting
process are one of the methods by which the Group monitors
the ongoing suitability of its VaR model. Backtesting
exceptions are those instances when a realised loss exceeds
the predicted VaR. At the 99% confidence level, no more than
one backtesting exception is expected every 100 trading
days. The Group experienced no backtesting exceptions
at legal entity level during 2006.
The Group’s trading activities are carried out principally by Global Banking & Markets. The chart below depicts the number of days
on which Global Banking & Markets’ trading income fell within stated ranges.