RBS 2008 Annual Report Download - page 85

84
Business review continued
RBS Group Annual Report and Accounts 2008
Credit risk
Principles for credit risk management (audited)
The key principles for credit risk management in the Group are as
follows:
•A credit risk assessment of the customer and credit facilities is
undertaken prior to approval of credit exposure. Typically, this
includes both quantitative and qualitative elements including, the
purpose of the credit and sources of repayment; compliance with
affordability tests; repayment history; ability to repay; sensitivity to
economic and market developments; and risk-adjusted return based
on credit risk measures appropriate to the customer and facility type.
•Credit risk authority is specifically granted in writing to individuals
involved in the granting of credit approval, whether this is individually
or collectively as part of a credit committee. In exercising credit
authority, individuals are required to act independently of business
considerations and must declare any conflicts of interest.
•Credit exposures, once approved, are monitored, managed and
reviewed periodically against approved limits. Lower quality
exposures are subject to more frequent analysis and assessment.
•Credit risk management works with business functions on the ongoing
management of the credit portfolio, including decisions on mitigating
actions taken against individual exposures or broader portfolios.
•Customers with emerging credit problems are identified early and
classified accordingly. Remedial actions are implemented promptly
and are intended to restore the customer to a satisfactory status and
minimise any potential loss to the Group.
•Stress testing of portfolios is undertaken to assess the potential credit
impact of non-systemic scenarios and wider macroeconomic events
on the Group’s income and capital.
Specialist credit risk teams oversee the credit process independently,
making credit decisions within their discretion, or recommending
decisions to the appropriate credit committee.
Assessments of corporate borrower and transaction risk are undertaken
using fundamental credit analysis and the application of general
corporate and certain specialist counterparty credit risk models.
Financial markets counterparties are approved by a dedicated credit
function which specialises in traded market product risk. Specialist
credit grading models exist for certain bank and non-bank financial
institutions.
Different approaches are used for the management of wholesale and
retail businesses:
•Wholesale businesses: exposures are aggregated to determine the
appropriate level of credit approval required and to facilitate
consolidated credit risk management. Credit applications for
corporate customers are prepared by relationship managers (RMs) in
the units originating the credit exposures, or by the RM team with
lead responsibility for a counterparty where a customer has
relationships with different divisions and business units across the
Group. This includes the assignment of counterparty credit grades
and LGD estimates using approved models, which are also
independently checked by the credit team.
•Retail businesses: the retail business makes a large volume of small
value credit decisions. Credit decisions will typically involve an
application for a new or additional product or a change in facilities on
an existing product. The majority of these decisions are based upon
automated strategies utilising industry standard credit and behaviour
scoring techniques.