RBS 2009 Annual Report Download - page 21

19RBS Group Annual Report and Accounts 2009
Our strategic plan and progress
Clearly defined financial targets
Key risks and uncertainties
Definition
The risk arising from the
possibility that the Group
will incur losses owing to
the failure of customers to
meet their financial
obligations to the Group.
The risk of being unable to
meet obligations as they
fall due.
The risk that the value of
an asset or liability may
change as a result of a
change in market risk
factors.
The risk of financial loss
through fluctuations in the
timing, frequency and/or
severity of insured events,
relative to the expectations
at the time of underwriting.
The risk of financial,
customer or reputational
loss resulting from: fraud;
human error; ineffective,
or inadequately designed,
processes or systems;
improper behaviour;
or external events.
The risks arising from
regulatory changes and
enforcement.
The risks arising from
reputation risk.
Pension risk is the risk
that the Group may have
to make additional
contributions to its defined
benefit pension schemes.
Features
•Loss characteristics
vary materially across
portfolios
•Significant correlation
between losses and the
macroeconomic
environment
•Concentration risk –
potential for large
material losses
•Potential to disrupt the
business model and
stop normal functions of
the Group
•Significantly correlated
with credit risk losses
•Potential for large
material losses
•Potential for losses due
to stress events
•Frequent small losses
•Infrequent material
losses
•Frequent small losses
•Infrequent material
losses
•Risk of regulatory
changes
•Compliance with
regulations
•Potential for fines and/or
restrictions in business
activities
•Additional regulation can
be introduced as a result
of other risk losses
•Failure to meet
expectations of
stakeholders
•Pension risk arises
because of the
uncertainty of future
investment returns and
the projected value of
schemes’ liabilities
Key developments in 2009
Asset quality deteriorated in all
portfolios in 2009, with higher
impairments impacting our earnings
and weaker assets incurring
increased capital requirements. In
both cases, the impact was greatest
in corporate portfolios and the rate
of decline was highest in the first
half of the year.
Reopening of credit markets,
increased market focus on building
up liquidity reserves, and market-
wide liquidity provided to the
banking system through central bank
quantitative easing.
Due to the extended period of
market volatility since August 2007,
the level of modelled market risk has
increased, despite a reduction in
trading book exposure.
Increasing losses due to bodily
injury claims in the motor insurance
business affecting both RBS
Insurance and the UK motor
insurance industry as a whole.
Unprecedented levels of structural
change within the Group, the difficult
economic environment and the rising
level of external threats (e.g. fraud)
all combined to expose the Group to
a heightened level of operational risk.
The scale of regulatory change was
maintained in key areas such as:
systemically important firms;
prudential and conduct issues; and
treating customers fairly. In addition,
we saw increased regulatory scrutiny
and supervision around governance,
capital, liquidity and remuneration.
On reputation, government support
brings heightened public scrutiny of
our wider Corporate Sustainability
agenda e.g. how we manage
customers, data, diversity, and our
environmental impact.
The next formal valuation of the main
UK pension scheme, due as at 31
March 2010, is expected to show a
deficit. This may lead to an increase
in contributions in 2010.
Risk mitigation
We have increased investment in
specialised workout and collection
functions. Enhancements to various
elements of our Credit Risk
framework, which has been
embedded into key business
processes, will ensure that the size
and shape of the Group's portfolio
is aligned to its strategic targets.
We have built up a significant
liquidity reserve (£171 billion),
increased average maturity of
wholesale funding, and reduced
our customer funding gap.
We have reduced trading book
exposure with sales, reclassification
of assets to the non-trading book
and write-downs.
We have taken various steps to
address the current and future
impact of bodily injury trends,
including: rating and pricing
changes; sales optimisation;
and claims management.
We have enhanced control
frameworks and policy standards
to improve the identification and
management of operational risk
within each of our Divisions. Material
events are escalated to Divisional
and Group Executive.
We have a proactive engagement
strategy with the FSA and other
regulators, driven by a no-surprises
culture, and a well developed
Regulatory Developments framework,
which assigns Senior Executive
responsibility for all material risks.
On reputation, we established
the Group Corporate Sustainability
Committee in January 2010, chaired
by one of our Non-Executive
Directors.
We have taken steps to mitigate the
cost and risk of our main UK pension
scheme and other UK and Republic
of Ireland schemes by capping
pensionable salary growth.
Risk Type
Credit risk
(including
country and
political risks)
Funding and
liquidity risk
Market risk
Insurance
risk
Operational
risk
Regulatory
risk
Other risk