RBS 2009 Annual Report Download - page 157

Business review
Risk, capital and liquidity management
155RBS Group Annual Report and Accounts 2009
Stress testing
The Group performs stress tests to simulate how events may impact its
funding and liquidity capabilities. Such tests assist in the planning of the
overall balance sheet structure, help define suitable limits for control of
the risk arising from the mismatch of maturities across the balance
sheet and from undrawn commitments and other contingent obligations,
and feed into the risk appetite and contingency funding plan. The form
and content of stress tests are updated where required as market
conditions evolve. These stresses include the following scenarios:
•Idiosyncratic stress: an unforeseen, name-specific, liquidity stress, with
the initial short-term period of stress lasting for at least two weeks;
•Market stress: an unforeseen, market-wide liquidity stress of three
months duration;
•Idiosyncratic and market stress: a combination of idiosyncratic and
market stress;
•Rating downgrade: one and two notch long-term credit rating
downgrade scenarios; and
•Daily market lockout: no access to unsecured funding and no
funding rollovers are possible.
Contingency planning
Contingency funding plans have been developed which incorporate
early warning indicators to monitor market conditions. The Group
reviews its contingency funding plans in the light of evolving market
conditions and stress test results. The contingency funding plans cover:
the available sources of contingent funding to supplement cash flow
shortages; the lead times to obtain such funding; the roles and
responsibilities of those involved in the contingency plans; the
communication and escalation requirements when early warning
indicators signal deteriorating market conditions; and the ability and
circumstances within which the Group accesses central bank liquidity.
Monitoring
Liquidity risk is constantly monitored to evaluate the Group’s position
having regard to its risk appetite and key metrics. Daily, weekly and
monthly monitoring and control processes are in place, which allow
management to take appropriate action. Actions taken to improve the
liquidity risk include a focus on improving the loan to deposit ratio,
issuing longer-term wholesale funding, both guaranteed and
unguaranteed, and the size of the conduit commitments. Metrics
include, but are not limited to;
Wholesale funding > one year: As the wholesale funding markets have
improved over the course of 2009 the Group has been better able to
manage both its short and longer-term funding requirements and has
significantly reduced its reliance on central bank funding. In 2009, the
Group issued £21 billion of public, private and structured unguaranteed
debt securities with a maturity greater than one year including issuances
with maturities of ten years and five years of £3 billion and £2 billion
respectively. To provide protection from liquidity risk in these markets the
Group targets a ratio of wholesale funding greater than one year. The
proportion of outstanding debt instruments issued with a remaining
maturity of greater than 12 months has increased from 45% at 31
December 2008 to 50% at 31 December 2009, reflecting a lengthening
of the maturity profile of debt issuance over the period. The Group is
also targeting an absolute funding reliance (unsecured wholesale
funding with a residual maturity of less than one year) of less than £150
billion by 2013. The 2013 target can also be segmented further into
bank deposits of less than £65 billion and other unsecured wholesale
funding of less than £85 billion. The reliance on wholesale funding has
improved from £343 billion at 31 December 2008 to £249 billion at
December 2009 (and this figure includes
£109 billion of bank deposits).
In common with other UK banks, the Group has benefited from the UK
Government’s scheme to guarantee debt issuance. At 31 December
2009 the Group had debt securities in issue amounting to £52 billion
(2008 – £32 billion), which is approximately 38% of the total UK
Government guaranteed debt.
Loan to deposit ratio: The Group monitors the loan to deposit ratio as
a key metric. This ratio has decreased from 118% at 31 December 2008
to 104% at 31 December 2009 for Core and from 151% at 31 December
2008 to 134% at 31 December 2009 for the Group. The Group has a
target of 100% for 2013. The gap between customer loans and
customer deposits (excluding repos) narrowed by £91 billion from £233
billion at 31 December 2008 to £142 billion at 31 December 2009.