RBS 2010 Annual Report Download - page 135

Structure of prudential regulation in the UK
Following the consultation by HM Treasury on ‘A new approach to
financial regulation’ in 2010, the government subsequently published
further detailed proposals to give the Bank of England responsibility for
prudential regulation, and to create a new Consumer Protection and
Markets Authority to protect the interests of bank customers.
Increase in the level of customer protection under Financial Services
Compensation Scheme
The European Commission has introduced a uniform compensation level
of €100,000 across Member States from 1 January 2011. The sterling
equivalent was confirmed by HM Treasury as £85,000.
Independent Commission on Banking
The Independent Commission on Banking has published responses from
banks, academics and other interested parties to its initial consultation.
In its summary of the evidence received the Commission noted that there
was considerable interest, both positive and negative, in the question of
splitting retail and investment banks. The Commission plans to publish its
interim report in April.
FSA Code on remuneration
In July 2009 the European Commission adopted a proposal to further
amend the Capital Requirements Directive (CRD) which included
proposals on remuneration policies. This was subsequently voted for and
approved (CRD III).
CRD III required the Commission of European Banking Supervisors
(CEBS) to issue guidelines on sound remuneration policies which comply
with its principles and these were issued on 10 December 2010 (the
“Guidelines”).
The FSA amended its Remuneration Code to take into account the
Guidelines and published its policy statement on remuneration on 17
December 2010.
The Group is required to be compliant with the FSA Remuneration Code
with effect from 1 January 2011:
xas a “Tier 1” organisation, the Code applies to all employees on a
global basis;
xthere are specific remuneration and governance requirements in
relation to “Code Staff”; and
xfollowing an ongoing review of our remuneration arrangements and
discussions with the FSA, 2011 RBS remuneration arrangements
are fully compliant with the FSA Remuneration Code.
Bank levy
In his 22 June 2010 budget statement, the Chancellor announced that the
UK Government will introduce an annual bank levy. The Finance Bill
2011 contains details of how the levy will be calculated and collected.
The levy will be collected through the existing quarterly corporation tax
collection mechanism starting with payment dates on or after the date the
Finance Bill 2011 receives Royal Assent. Further information is included
on page 368.
Stress and scenario testing
Stress testing forms part of the Group’s risk and capital framework and is
an integral component of Basel II. As a key risk management tool, stress
testing highlights to senior management potential adverse unexpected
outcomes related to a mixture of risks and provides an indication of how
much capital might be required to absorb losses, should adverse
scenarios occur. Stress testing is used at both a divisional and Group
level to assess risk concentrations, estimate the impact of stressed
earnings, impairments and write-downs on capital. It determines the
overall capital adequacy under a variety of adverse scenarios. The
principal business benefits of the stress testing framework include:
understanding the impact of recessionary scenarios; assessing material
risk concentrations; and forecasting the impact of market stress and
scenarios on the Group’s balance sheet liquidity.
Aseries of stress events are monitored on a regular basis to assess the
potential impact of an extreme yet plausible event on the Group. There
are four core elements of scenario stress testing:
xmacroeconomic stress testing considers the impact on both
earnings and capital for a range of scenarios. They entail multi-year
systemic shocks to assess the Group’s ability to meet its capital
requirements and liabilities as they fall due in a downturn in the
business cycle and/or macroeconomic environment;
xenterprise-wide stress testing considers scenarios that are not
macroeconomic in nature but are sufficiently broad to impact across
multiple risks or divisions and are likely to affect earnings, capital
and funding;
xcross-divisional stress testing includes scenarios which have
impacts across divisions relating to sensitivity to a common risk
factor(s). This would include, for example, sector based stress
testing across corporate portfolios and sensitivity analysis to stress
in market factors. These stress tests are discussed with senior
divisional management and are reported to senior committees
across the Group; and
xdivisional and risk specific stress testing is undertaken to support
risk identification and management. Examples include the daily
product based stress testing using a hybrid of hypothetical and
historical scenarios within market risk.
Portfolio analysis, using historic performance and forward looking
indicators of change, uses stress testing to facilitate the measurement of
potential exposure to events and seeks to quantify the impact of an
adverse change in factors which drive the performance and profitability of
aportfolio.
133RBS Group 2010
Business review
Risk and balance sheet management