RBS 2011 Annual Report Download - page 104

102 RBS Group 2011
Introduction*: Stress testing
Stress testing describes the evaluation of a bank’s financial position
under severe but plausible stress scenarios. Stress testing refers to the
application of individual stress tests and the broader framework under
which these tests are developed, evaluated and used within the Group’s
decision-making process in the context of the wider economic
environment.
Internal stress tests
The Group’s stress testing framework is designed to embed stress testing
as a key risk management technique into mainstream risk reporting,
capital planning and business processes at both Group and divisional
levels.
The Executive Risk Forum (see Risk governance on page 103) is the
main body overseeing the Group’s stress testing approach, processes
and results. The forum is primarily responsible for reviewing and
challenging the results of any Group-wide stress test and ensuring that,
where necessary, appropriate management actions are undertaken. The
Board Risk Committee will provide oversight and challenge as
appropriate.
Stress testing forms part of the Group’s risk and capital management
framework and is a major component of the Basel III requirements. It
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
materialise.
Stress testing is used at both divisional and Group levels to assess risk
concentrations and estimate the impact of stressed earnings,
impairments and write-downs on capital as well as the liquidity and
funding position of the Group. It determines overall capital adequacy
under a variety of adverse scenarios.
Aseries of stress events are monitored on a regular basis to assess the
potential impact of a severe yet plausible event on the Group. There are
four core types of scenario stress testing:
xmacroeconomic stress testing, which considers the impact on both
earnings and capital for a range of scenarios;
xenterprise-wide stress testing, which considers scenarios that are
not macroeconomic in nature but are sufficiently broad to entail
multiple risks or affect multiple divisions and are likely to affect
earnings, capital and funding;
xcross-divisional stress testing, which includes scenarios that affect
multiple divisions due to their sensitivity to a common risk factor; and
xdivisional and risk-specific stress testing, which is undertaken to
support risk identification and management.
*unaudited
Portfolio analysis, using historical performance and forward-looking
indicators of change, uses stress testing to assess potential exposure to
events and seeks to quantify the impact of an adverse change in factors
that drive the performance and profitability of a portfolio.
Industry-wide stress tests
The Group takes part in a number of industry-wide stress tests, in
particular, the European Banking Authority Stress Test and IMF UK
Financial Sector Assessment Program, results of which were published in
July 2011. These confirmed that the Group remains well capitalised with
a strong Core Tier 1 capital ratio and a strong Total capital ratio under
both baseline and adverse scenarios. During 2011, the Group also
undertook the FSA anchor scenario test.
In December 2011, the European Banking Authority published the results
of its recapitalisation exercise - a review of banks’ actual capital positions
on sovereign exposures - showing the Group had no overall capital
shortfall after including the sovereign capital buffer.
Group Policy Framework*
Achieving and sustaining a robust control framework in line with those of
the Group’s strongest international peers is critical to achieving the
successful delivery of the Group’s risk objectives.
With this goal in mind, the Group Policy Framework (GPF) has been
revised and broadened. The GPF consolidates a large number of
individual policies under a consistent and structured overarching
framework for conduct, control and governance. It provides clear
guidance and controls on how the Group does business, linked to its risk
appetite, its business conduct and compliance responsibilities and its
focus on delivering a control environment consistent with best practice
against relevant external benchmarks.
The GPF and related initiatives aim to ensure that:
xthe Group has clear control standards and ethical principles to cover
the risks that it faces to support effective risk management and meet
regulatory and legal requirements;
xpolicies are followed across the Group and compliance can be
clearly evidenced, assessed and reported by line management; and
xthe control environment is monitored and overseen through good
governance.
Communication and training programmes are provided to all relevant staff
as the policies are embedded, ensuring that staff are aware of their
responsibilities. The GPF is structured to ensure that policy standard
owners and sponsors review their policies on a regular basis, with any
identified shortfalls against industry best practice documented and
addressed within an agreed time frame.
Business review Risk and balance sheet management continued