RBS 2008 Annual Report Download - page 84

83RBS Group Annual Report and Accounts 2008
At Group level, a series of stress events are monitored on a regular
basis to assess the potential impact of an extreme yet plausible event
on the Group. There are two core elements of scenario stress testing:
•Recessionary stress testing considers the impact on both earnings
and capital of a range of recessionary scenarios. These are multi-
year systemic shocks to assess the Group’s ability to meet its capital
requirements and liabilities as they fall due under a significant but
plausible downturn in the business cycle and/or macroeconomic
environment. The summary results are included within the monthly
risk report to the Board and discussed in separate papers on a half-
yearly basis.
•Integrated stress testing considers firm wide stress tests to measure
the Group’s exposure to exceptional but plausible economic and
geopolitical events. Stress testing supports the identification and
quantification of material risks that may arise under stress scenarios,
and provides information to support management decision-making
around risk appetite and control.
Cross divisional stress testing, undertaken to support the Group’s
framework for managing industry and geographical sector
concentrations, is performed through the identification of scenarios
which are likely to affect groups of inter-related (correlated) sectors.
These stress tests are discussed with senior divisional management and
are reported to GRC, GEMC, GALCO and GAC. The Group manages to
a trigger limit on the stressed impairment charge for an individual
scenario.
Portfolio analysis, using historic performance and forward looking
indicators of change, uses stress testing to facilitate the measurement
of potential exposure to events and seeks to quantify the impact of an
adverse change in factors which drive the performance and profitability
of a portfolio.
Risk coverage
The main risks facing the Group are shown below.
Risk type Definition Features
Credit risk The risk arising from the possibility that the Group will Loss characteristics vary materially across portfolios.
(including country incur losses from the failure of customers to meet their
and political risks) financial obligations to the Group. Significant correlation between losses and the
macroeconomic environment.
Concentration risk.
Funding and liquidity The risk of losses through being unable to meet Potential to disrupt the business model and stop normal
risk obligations as they fall due. functions of the Group.
Significantly correlated with credit risk losses.
Market risk The risk that the value of an asset or liability may change Potential for large material losses.
as a result of a change in market rates.
Significantly correlated with equity risk and the
macroeconomic environment.
Insurance risk The risk of financial loss through fluctuations in the timing, Frequent small losses.
frequency and/or severity of insured events, relative to
the expectations at the time of underwriting. Infrequent material losses.
Operational risk The risk of financial loss or reputational impact resulting Generally immaterial losses.
from fraud; human error; ineffective or inadequately
designed processes or systems; improper behaviour;
legal events; or from external events.
Regulatory risk The risks arising from regulatory changes/enforcement. Risk of regulatory changes.
Compliance with regulations.
Potential for fines and/or restrictions in business activities.
Other risk The risks arising from reputation and pension fund risk. Additional regulation can be introduced as a result
of other risk losses.