RBS 2011 Annual Report Download - page 109

RBS Group 2011 107
Risk coverage*
The main risk types faced by the Group are presented below, together with a summary of the key areas of focus and how the Group managed these
risks in 2011.
Risk type Definition Features How the Group managed risk and the focus in 2011
Capital, liquidity
and funding risk
The risk that the Group has
insufficient capital or is unable
to meet its financial liabilities
as they fall due.
Potential to disrupt the
business model and stop
normal functions of the Group.
Potential to cause the Group
to fail to meet the supervisory
requirements of regulators.
Significantly driven by credit
risk losses.
The Group plans for and maintains an adequate amount and mix
of capital consistent with its risk profile. This ensures that in any
foreseeable scenario the Group holds minimum capital to meet
the standards and requirements of investors, regulators and
depositors. The amount of capital required is determined through
risk assessments and stress testing.
Active run-off of capital intensive assets in Non-Core and other
risk mitigation left the Core Tier 1 ratio strong at 10.6%, despite a
£21 billion uplift in RWAs from the implementation of CRD III in
December 2011. Refer to pages 110 to 115.
Maintaining the structural integrity of the Group’s balance sheet
requires active management of both asset and liability portfolios
as necessary. Strong term debt issuance and planned reductions
in the funded balance sheet enabled the Group to strengthen its
liquidity and funding position as market conditions worsened.
Refer to pages 116 to 130.
Credit risk
(including
counterparty risk)
The risk that the Group will
incur losses owing to the
failure of a customer to meet
its obligation to settle
outstanding amounts.
Loss characteristics vary
materially across portfolios.
Significant link between losses
and the macroeconomic
environment.
Can include concentration risk
-the risk of loss due to the
concentration of credit risk to a
specific product, asset class,
sector or counterparty.
The Group manages credit risk based on a suite of
credit approval and risk concentration frameworks and
associated risk management systems and tools. It also continues
to reduce the risk associated with legacy exposures through
further reductions in Non-Core assets.
During 2011, asset quality continued to improve, resulting in loan
impairment charges 21% lower than in 2010 despite continuing
challenges in Ulster Bank Group (Core and Non-Core) and
corporate real estate portfolios. The Group continued to make
progress in reducing key credit concentration risks, with credit
exposures in excess of single name concentration limits declining
15% during the year and exposure to commercial real estate
declining 14%. Refer to pages 134 to 207.
Country risk The risk of material losses
arising from significant
country-specific events.
Can arise from sovereign
events, economic events,
political events, natural
disasters or conflicts.
Potential to affect parts of the
Group’s credit portfolio that are
directly or indirectly linked to
the country in question.
All country exposures are covered by the Group’s country risk
management framework. This includes active management of
portfolios either when these have been identified as exhibiting
signs of stress through the Group’s country Watchlist process or
when it is otherwise considered appropriate. Portfolio reviews are
undertaken to align country risk profiles to the Group’s country
risk appetite in light of economic and political developments.
Sovereign risk increased in 2011, resulting in rating downgrades
for a number of countries, including several eurozone members.
This resulted in an impairment charge recognised by the Group in
2011 in respect of available-for-sale Greek government bonds. In
response, the Group further strengthened its country risk appetite
setting and risk management systems during the year and
brought a number of advanced countries under limit control. This
contributed to a reduction in exposure to a range of countries.
Refer to pages 208 to 228.