RBS 2010 Annual Report Download - page 20

RBS Group 201018
Our approach to risk management continued
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.
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.
Market risk
The risk that the value
of an asset or liability
may change as a result
of a change in market
factors.
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.
Risk Type
Definition
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.
Potential to fail to meet the
supervisory requirements of
regulators.
Significantly correlates with
credit risk losses.
Potential for large material
losses.
Potential for losses due to
stress events.
Frequent small losses which
are material in aggregate.
Infrequent large material
losses.
Asset quality has broadly
stabilised, resulting in
aggregate 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.
We made further
enhancements to the Group’s
credit risk frameworks as well
as the systems and tools that
support credit risk
management processes. We
reduced the risk associated
with legacy exposures
through further reductions in
Non-Core assets.
Against a backdrop of further
market instability, we made
progress in meeting our
strategic objectives: reduced
reliance on short-term
wholesale funding; expanded
customer deposit franchise;
and increased maturity of
term debt issuance.
We strengthened the
structural integrity of the
balance sheet through active
management of both asset
and liability portfolios. Also,
we have constructed a
significant centrally-managed
liquidity portfolio
(£155 billion).
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.
We have continued to
enhance our market risk
management framework.
We have reduced trading and
banking book exposures (with
asset sales and write-downs
within Non-Core and banking
book available-for-sale assets
in Core).
There were significant losses
as a result of bodily injury
claims in the UK motor
insurance business impacting
RBS Insurance.
In our motor business,
we increased pricing in
response to bodily injury
trends and we made
significant progress in
removing higher-risk
business through
targeted rating actions.
How we manage them
Key
developments
in 2010
Risk mitigation
The main risk types facing the Group, which are covered by the risk appetite framework are shown below: