RBS 2008 Annual Report Download - page 113

RBS Group Annual Report and Accounts 2008112
Business review continued
Non-trading interest rate VaR (audited)
Non-trading interest rate VaR for the Group’s treasury and retail and
commercial banking activities was £70.6 million at 31 December 2008
(2007 – £42.9 million) with the major exposure being to changes in longer
term US dollar interest rates. During 2008, the maximum VaR was £117.6
million (2007 – £53.6 million), the minimum was £53.9 million (2007 –
£32.9 million) and the average was £75.1 million (2007 – £43.2 million).
A breakdown of the Group’s non-trading VaR on a statutory basis by
currency is shown below.
Citizens Financial Group (CFG) was the main contributor to overall non-
trading interest rate VaR. CFG manages non-trading interest rate risk
with the objective of minimising accrual accounted earnings volatility. To
do so it uses a variety of income simulation and valuation risk measures
that more effectively capture the risk to earnings due to mortgage
prepayment and competitive deposit pricing behaviour than a VaR-
based methodology would. This balance sheet management approach
is common for US retail banks. Interest rate risk in the banking book is
managed by a professional treasury function which optimises the yield,
whilst staying within approved limits on interest rate risk, liquidity and
capitalisation.
Mortgages, home equity loans and mortgage-backed securities (MBS)
comprise a large portion of CFG’s assets. In the US, mortgage and
home equity customers may prepay loans without penalty. However,
under the requirements of FAS 133, the risk that they may do so cannot
be hedged in a cost effective manner and must be born by the lender.
Prepayment risk is a primary component of interest rate risk in the
banking book at CFG.
2008 2007
Carrying Carrying
Principal(1) amount Principal(1) amount
US$m US$m US$m US$m
Total MBS and mortgages 63,542 63,165 69,948 69,672
MBS – total
– high grade (AA or AAA rated) 26,268 25,893 26,848 26,572
– rated C to A 602 600 ——
MBS – commercial
– high grade (AA or AAA rated) 2,253 2,089 2,205 2,211
MBS – retail
– high grade (AA or AAA rated) 24,015 23,804 24,643 24,361
– rated C to A 602 600 ——
Residential Mortgage and Home Equity Loans (non-securitised, fixed rate and ARM, prepayable) 36,672 36,672 43,100 43,100
Note:
(1) The principal on MBS is the redemption amount on maturity or, in the case of an amortising instrument, the sum of future redemption amounts through the residual life of the security.
2008 2007
£m £m
EUR 19.0 4.5
GBP 18.3 7.3
USD 64.8 52.8
Other 4.5 2.6