RBS 2010 Annual Report Download - page 125

Risk coverage
The main risk types facing the Group which are covered by the risk appetite framework and managed by the above committees are shown below:
Risk type Definition Features Key developments in 2010 Risk mitigation
Funding and
liquidity risk
The risk that the Group
does not have sufficient
financial resources to
meet its commitments
when they fall due, or can
secure them only at
excessive cost.
Potential to disrupt the
business model and stop
normal functions of the
Group.
Potential to fail to meet the
supervisory requirements of
regulators.
Significantly correlates with
credit risk losses.
Against a backdrop of further
market instability, progress
was made in meeting the
Group’s strategic objectives:
reduced reliance on short-
term wholesale funding;
expanded customer deposit
franchise; and increased
maturity of term debt
issuance.
The Group strengthened the structural
integrity of the balance sheet through
active management of both asset and
liability portfolios including a centrally-
managed liquidity portfolio of
£155 billion.
Credit risk
(including
counterparty,
country and
political risks)
The risk that the Group
will incur losses owing to
the failure of customers
to meet their financial
obligations to the Group.
Loss characteristics vary
materially across portfolios.
Significant correlation
between losses and the
macroeconomic
environment.
Concentration risk - potential
for large material losses.
Asset quality has broadly
stabilised, resulting in total
loan impairments 33% lower
than in 2009. However,
weakness in the Irish
economy and falling property
values have resulted in the
doubling of Ulster Bank
Group impairments (Core
and Non-Core) in 2010.
Further enhancements were made to
the Group’s credit risk frameworks as
well as the systems and tools that
support credit risk management
processes. The Group continues to
reduce the risk associated with legacy
exposures through further reductions
in Non-Core assets.
Market risk The risk that the value of
an asset or liability may
change as a result of a
change in market factors.
Potential for large material
losses.
Potential for losses due to
stress events.
Markets have remained both
volatile and uncertain since
2007 resulting in a higher
level of market risk, despite a
reduction in trading book
exposure.
The Group has continued to enhance
its market risk management framework
and reduced trading and banking book
exposures, with asset sales and write-
downs within Non-Core and banking
book available-for-sale assets in Core.
Insurance risk 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.
Frequent small losses which
are material in aggregate.
Infrequent large material
losses.
There have been significant
losses as a result of bodily
injury claims across the UK
motor insurance industry,
including RBS Insurance.
In response to this, the industry has
increased pricing on motor insurance
business and the Group has made
significant progress in removing
higher-risk business through targeted
rating actions.
Operational
risk
The risk of loss resulting
from inadequate or failed
processes, people,
systems or from external
events.
Frequent small losses.
Infrequent material losses.
The level of operational risk
remains high due to the scale
of structural change occurring
across the Group; increased
government and regulatory
scrutiny; and external threats
(e.g. e-crime).
The Group Policy Framework (GPF)
supports the risk appetite setting
process and underpins the control
environment.
The three lines of defence model gives
assurance that the standards in GPF
are being adhered to.
123RBS Group 2010
Business review
Risk and balance sheet management