RBS 2011 Annual Report Download - page 103

RBS Group 2011 101
Risk appetite*
The Group’s focus on setting a clear risk appetite and embedding a
strong culture of risk management and control is designed to ensure it is
able to proactively identify and reduce risk exposures and has the
resilience to respond effectively to any unforeseen shocks.
The Group’s risk appetite identifies and establishes the level and type of
risks that it is able and willing to take in order to:
xmeet its strategic objectives - this includes the Group’s stated
objective of achieving and sustaining a standalone credit rating in
line with those of its strongest international peers; and
xmeet its wider obligations to stakeholders - the Group’s Strategic
Plan is built on the core foundations of serving its customers well,
acting responsibly and creating sustainable value for its
shareholders.
Aclear risk appetite provides a greater understanding across the Group
of the acceptable levels of risk for each business. It provides a solid
platform from which the Group can focus on its key business strengths
and competitive advantages over the long-term.
Approach and key principles
The Strategic Plan set key performance indicators for capital, leverage,
liquidity and funding, aligned with the Group’s strategic objectives. It also
established a Non-Core division to manage, dispose of and run-off assets
that the Group was seeking to exit from, which by definition were outside
its appetite.
Building on these core foundations, the Group has developed a
framework that sets and implements an appropriate risk appetite for the
Group (and its main businesses), supported by a regular monitoring and
review process.
Under this framework, risk appetite targets - based on both the
quantitative and qualitative aspects of risk - have been set by the Group
Board, aligned with Group and divisional strategic objectives. These
targets support and augment the strategic, financial and risk controls that
are already in place and help to shape the way the Group operates at all
levels. Clear roles and responsibilities are established to measure,
cascade and report performance against risk appetite and to provide
assurances that business is being conducted within approved risk limits
and tolerances.
The development of this framework has been based on the following best
practice principles:
xstrong leadership from the Group Board in establishing and setting
risk appetite and in ensuring its purpose is understood and its use
promoted as good business practice;
xastrong risk management culture, in which risk is clearly and
meaningfully aligned with business behaviours and outcomes;
xaclose collaborative partnership between the risk, strategy, treasury
and finance functions that facilitates a broader internal debate on
key issues; and
xclear accountability by each division (and business unit) for the level
of risk it is prepared to take to achieve its business objectives.
Group-wide stress testing is used to assess whether strategic plans are
consistent with risk appetite and to measure the key drivers of risk (down
to business unit level), with mitigating actions identified whenever the risk
profile is considered to be outside (or close to) acceptable levels (see
page 102).
Design to delivery
The Group’s risk appetite has been set by the Group Board and is now
operational. Significant progress has been made in establishing the
underlying framework and rolling it out across the Group and its divisions.
The key channels through which risk appetite is cascaded throughout and
embedded in each division are:
xdivisional risk appetite statements - each division has developed its
own risk appetite statement, which is based on the four strategic risk
objectives and is appropriate for its business plans but also aligned
with the Group’s risk appetite targets;
xrisk control frameworks and limits - risk control frameworks set clear
guidance on acceptable limits and tolerances for all material risk
types (e.g. credit, market and country risk), aligned with the Group’s
risk appetite targets;
xGroup operational and conduct risk appetite - the Group has
developed a robust control environment to ensure it conducts its
activities in accordance with its regulatory and other obligations; and
xculture, values and remuneration - a programme of communication,
engagement and training is being rolled out across the Group to
engender a wide understanding of the purpose of risk appetite.
The Group regards the implementation of its risk appetite framework as
an essential step in driving the cultural change required to achieve its
strategic objectives and a dynamic, ongoing process. The Board Risk
Committee (see the Report of the Board Risk Committee on pages 268 to
271) reviews both the targets and the framework on a regular basis, to
ensure they remain aligned to strategic objectives, business
performance, emerging risks and changes in the external environment.