RBS 2007 Annual Report Download - page 83

Business review
81
RBS Group • Annual Report and Accounts 2007
Short positions in various securities are held primarily by RBS
Greenwich Capital in the US, RBS Global Banking & Markets
and by ABN AMRO Global Markets. Excluding ABN AMRO,
the level of funding from short term unsecured debt issuance,
bank deposits (excluding repos) and short positions has
increased by £62.0 billion (44%) to represent 23% of total
funding at 31 December 2007. Including ABN AMRO, such
short-term wholesale borrowing has added £175.3 billion to
that figure, to represent 26% of total funding in the enlarged
balance sheet.
Net customer activity
Excluding ABN AMRO, net customer lending, excluding repos,
rose by £14.7 billion (17%) over the course of 2007 as the
growth in loans and advances to customers continued to
exceed growth in customer accounts, thus increasing
commensurately the reliance on wholesale market funding to
support loan growth.
Including ABN AMRO, net customer lending, excluding repos,
has added £43.5 billion, reducing the ratio of loans and
advances to customer accounts to 126.6%.
Including Excluding
ABN AMRO ABN AMRO
2007 2007 2006 2005
Net customer activity £m £m £m £m
Loans and advances to customers (gross, excluding reverse repos) 693,331 468,942 407,918 372,223
Customer accounts (excluding repos) 547,449 366,538 320,238 294,113
Customer lending less customer accounts 145,882 102,404 87,680 78,110
Loans and advances to customers as a % of customer accounts (excluding repos) 126.6% 127.9% 127.4% 126.6%
Management of term structure
The Group evaluates on a regular basis its structural liquidity
risk and applies a variety of balance sheet management and
term funding strategies to maintain this risk within its normal
policy parameters.
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.
Stress testing
In August 2007, a systemic liquidity stress event was triggered
by difficulties in the US sub-prime mortgage market which then
spread more widely to the global asset-backed market and
impacted adversely the overall supply and cost of funding and
liquidity for other than very short-term maturities. RBS has
managed its liquidity position through those market conditions,
increased its liquidity cushion and remains able fully to meet its
funding needs.
The Group performs stress tests to simulate how events may
impact its funding and liquidity capabilities. Such tests inform
the overall balance sheet structure and help define prudent
limits for control of the risk arising from the mismatch of
maturities across the balance sheet and from undrawn
commitments and other contingent obligations. The nature of
stress tests is kept under review in line with evolving market
conditions.
Contingency funding plans are maintained to anticipate and
respond to any approaching or actual material deterioration in
market conditions. The Group remains confident that it can
manage its liquidity requirements effectively under such
circumstances.
Daily management
The primary focus of the daily management activity is to
ensure access to sufficient liquidity to meet cash flow
obligations within key time horizons, in particular out to one
month ahead.
The short-term maturity structure of the Group’s liabilities and
assets is managed daily to ensure that all material or potential
cash flow obligations, arising from undrawn commitments and
other contingent obligations can be met. Potential sources
include cash inflows from maturing assets, new borrowing or
the sale of various debt securities held (after allowing for
appropriate haircuts).
Short-term liquidity risk is generally managed on a
consolidated basis with internal liquidity mismatch limits set for
all subsidiaries and non-UK branches which have material
local treasury activities, thereby assuring that the daily
maintenance of the Group’s overall liquidity risk position is not
compromised. ABN AMRO, Citizens Financial Group and RBS
Insurance manage liquidity locally, given different regulatory
regimes, subject to review by Group Treasury. As integration of
ABN AMRO’s businesses within the Group proceeds, the
liquidity risk policies, parameters and metrics used will be
progressively aligned within a single framework.