RBS 2009 Annual Report Download - page 119

Business review
Risk, capital and liquidity management
Risk, capital and liquidity management
On pages 117 to 206 of the Business review certain information has
been audited and is part of the Group’s financial statements as
permitted by IFRS 7. Other disclosures are unaudited and labelled with
an asterisk (*). Key points within this section generally relate to the
Group before RFS Holdings minority interest.
Overview*
Conditions during the year continued to prove challenging as the
ongoing deterioration in economic conditions and financial markets seen
during 2008 continued into 2009. Market stress peaked during the first
quarter of 2009 with broad improvement since then. This reflects a
global effort by many governments and central banks to ease monetary
conditions, increase liquidity within the financial system and support
banks with a combination of increased capital, guarantees and
strengthened deposit insurance. One resulting benefit for banks
generally has been a significant improvement in the liquidity of money
and debt markets. At the same time, regulatory oversight of the banking
sector has increased globally and is expected to continue at a
heightened level.
More recently, the major economies have started to demonstrate a
gradually improving macroeconomic position, although conditions
remain fragile. Areas of particular uncertainty include possible effects
from governments ending their financial stimulus initiatives and central
banks moving to exit from positions of historically very low interest rates,
as well as reversing quantitative easing. These look likely to occur
against a backdrop of heightened personal and corporate insolvency as
well as rising unemployment.
The Group has been developing and adapting to an evolving economic
environment, against a background of the strategic review which
includes a clearly stated ambition to achieve standalone strength. The
core aims of the strategic plan are to improve the risk profile of the
Group and to reposition the balance sheet around the Group’s core
strengths. The Group level risk appetite statements and limits have been
reviewed to ensure they are in line with the strategy. Any potential areas
of misalignment between risk appetite and the Group strategy have
been discussed by the Executive Risk Forum and remediation plans
have been put in place.
Enhancements have been made to a number of the risk frameworks,
including:
•A new credit approval process has been introduced during the year,
based on a pairing of business and risk managers authorised to
approve credit. This replaced the former credit committee process;
•Exposure to higher risk countries has been reduced and a new risk
limits framework has been implemented across the Group;
•Single name and sector wide credit concentrations continue to
receive a high level of attention and further enhancements to the
frameworks were agreed in the fourth quarter of the year;
•In addition to the move to value-at-risk (VaR) based on a 99%
confidence level, from 95%, the Group has improved and
strengthened its market risk limit framework increasing the
transparency of market risk taken across the Group’s businesses in
both the trading and non-trading portfolios;
•The Group’s funding and liquidity profile is supported by explicit
targets and metrics to control the size and extent of both short-term
and long-term liquidity risk; and
•An improved reporting programme has been implemented to
increase transparency and improve the management of risk
exposures.
Credit impairments in 2009 were materially higher than the previous
year. As the year progressed, the level of impairments moderated, with
the highest quarterly charge incurred in the second quarter. It is
expected that the results for 2010 and 2011 will continue to be affected
by a heightened level of credit impairments as exposures in the Non-
Core division are managed down and the economic environment
continues to impact the Core business. The risk weightings applied to
assets are also expected to increase due to procyclicality and as a
result the amount of capital that banks generally are required to hold
will increase. Future regulatory changes are also expected to increase
the capital requirements of the banking sector. Against this background,
the Non-Core portfolio is reducing and the Group has materially
strengthened its capital base through the B share issuance in
December 2009.
117RBS Group Annual Report and Accounts 2009
* unaudited