RBS 2010 Annual Report Download - page 136

Balance sheet management: Funding and liquidity risk
All disclosures in this section (pages 134 to 145) are audited unless
indicated otherwise with an asterisk (*).
Introduction
The Group’s balance sheet composition is a function of the broad array of
product offerings and diverse markets served by its Core divisions. The
structural integrity of the balance sheet is augmented as needed through
active management of both asset and liability portfolios. The objective of
these activities is to optimise liquidity transformation in normal business
environments while ensuring adequate coverage of all cash requirements
under extreme stress conditions.
Diversification of the Group’s funding base is central to the liquidity
management strategy. The Group’s businesses have developed large
customer franchises, the largest being in the UK, US and Ireland but
extend into Europe, Asia and Latin America. Customer deposits provide
large pools of stable funding to support the majority of the Group’s
lending. It is a strategic objective to improve the Group’s loan to deposit
ratio to 100%, or better, by 2013.
The Group also accesses professional markets funding by way of public
and private debt issuances on an unsecured and secured basis. These
debt issuance programmes are spread across multiple currencies, and
maturities to appeal to a broad range of investor types, and preferences
around the world. This market based funding supplements the Group’s
structural liquidity needs and in some cases achieves certain capital
objectives.
Stress testing
Simulated liquidity stress testing is periodically performed for each
business and applied to the major operating subsidiary balance sheets. A
variety of firm-specific and market related scenarios are used at the
consolidated level and in individual countries. These scenarios include
assumptions about significant changes in key funding sources, credit
ratings, contingent uses of funding, and political and economic conditions
in certain countries. Stress tests are regularly updated based on
changing market conditions.
Contingency planning
The Group has a Contingency Funding Plan (CFP) which is maintained
and updated as the balance sheet evolves. The CFP is linked to stress
test results and forms the foundation for liquidity risk limits. Limits in the
business-as-usual environment are bounded by capacity to satisfy the
Group’s liquidity needs in the stress environments. The CFP provides a
detailed description of the availability, size and timing of all sources of
contingent liquidity available to the Group in a stress event. These are
ranked in order of economic impact and effectiveness to meet the
anticipated stress requirement. The CFP includes documented
procedures and sign-offs for actions that may require businesses to
provide access to customer assets for collateralized borrowing,
securitisation or sale. Roles and responsibilities for the effective
implementation of the CFP are also documented.
Liquidity reserves
The Group maintains liquidity reserves sufficient to satisfy cash
requirements in the event of a severe disruption in its access to either
wholesale or retail funding sources. The reserves consist of high quality
unencumbered government securities and cash held on deposit at central
banks. Government securities vary by type and jurisdiction based on
local regulatory considerations. The currency mix of the reserves reflects
the underlying balance sheet composition.
Regulatory oversight
The Group operates in multiple jurisdictions and is subject to a number of
regulatory regimes.
The Group's lead regulator is the Financial Services Authority (FSA). The
FSA implemented a new liquidity regime on 1 June 2010. The new rules
provide a standardised approach applied to all UK banks. At RBS, the
rules focus on the RBS UK Defined Liquidity Group (a subset comprising
the Group’s five main UK banks, The Royal Bank of Scotland plc,
National Westminster Bank Plc, Ulster Bank Limited, Coutts & Company
and Adam & Company) and cover adequacy of liquidity resources,
controls, stress testing and the Individual Liquidity Adequacy Assessment
(ILAA) process. The ILAA informs the Board and FSA of the assessment
and quantification of the Group’s liquidity risks and their mitigation, and
how much current and future liquidity is required. The ILAA was approved
by the Board in November 2010. The FSA is expected to issue ‘Individual
Liquidity Guidance’ to the Group in 2011.
In the US, the Group’s operations are required to meet liquidity
requirements set out by the US Federal Reserve Bank, Office of the
Comptroller of the Currency, Federal Deposit Insurance Corporation and
Financial Industry Regulatory Authority. In the Netherlands, the Group is
subject to the De Nederlandsche Bank liquidity oversight regime.
Regulatory developments*
There have been a number of significant developments in the regulation
of liquidity risk.
In December 2010, the BCBS issued the ‘International framework for
liquidity risk measurement, standards and monitoring’ which confirmed
the introduction of two liquidity ratios, the liquidity coverage ratio (LCR)
and the net stable funding ratio (NSFR). The introduction of both of these
will be subject to an observation period, which includes review clauses to
address and identify any unintended consequences.
After an observation period beginning in 2011, the LCR, including any
revisions, will be introduced on 1 January 2015. The NSFR, including any
revisions, will move to a minimum standard by 1 January 2018.
*unaudited
RBS Group 2010134
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