RBS 2011 Annual Report Download - page 110

108 RBS Group 2011
Introduction*: Risk coverage continued
Risk type Definition Features How the Group managed risk and the focus in 2011
Market risk The risk arising from changes
in interest rates, foreign
currency, credit spreads, equity
prices and risk related factors
such as market volatilities.
Frequent small losses which
are material in aggregate.
Infrequent large material losses
due to stress events.
Acomprehensive structure is in place aimed at ensuring the
Group does not exceed its qualitative and quantitative
tolerance for market risk.
The Group’s market risk policy statements set out its qualitative
tolerance for market risk. They define the governance,
responsibilities and requirements for the identification,
measurement, analysis, management and communication of
the market risk arising from the Group’s trading and non-
trading investment activities.
The Group Market Risk limit framework expresses the Group’s
quantitative tolerance for market risk. The Group limit metrics
capture, in broad terms, the full range of market risk
exposures, ensuring the risk is appropriately defined and
communicated.
During 2011, the Group continued to manage down its market
risk exposure in Non-Core and reduce the asset-backed
securities trading inventory such that the trading portfolio
became less exposed to credit risk. Refer to pages 229 to 235.
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.
Frequent small losses which
are material in aggregate.
Infrequent large material
losses.
The Group’s framework for managing insurance risk, with
associated risk appetite and policy frameworks, is designed to
ensure insurance risks are appropriately identified, controlled,
managed, monitored, reported and mitigated.
Procedures are in place to address any issues, such as
breaches of risk appetite that are identified through monitoring
and reporting activities. If a breach occurs, an action plan to
address the issue is developed, implemented and monitored to
ensure the risk is adequately mitigated or a decision is taken to
accept it.
During 2011, focus on insurance risk appetite resulted in the
de-risking and significant re-pricing of certain classes of
business and exiting some altogether. Refer to page 236.
Operational risk The risk of loss resulting from
inadequate or failed processes,
people, systems or from
external events.
Frequent small losses.
Infrequent material losses.
The objective of operational risk management is to manage it
to an acceptable level. Processes to achieve this objective take
into account the cost of minimising the risk against the
resultant reduction in exposure.
During 2011, the Group took steps to enhance its management
of operational risks. This was particularly evident in respect of
risk appetite, the Group Policy Framework, risk assessment,
scenario analysis and statistical modelling for capital
requirements.
The level of operational risk remains high due to the scale of
structural change occurring across the Group, the pace of
regulatory change, the economic downturn and other external
threats, such as e-crime. Refer to pages 236 to 239.
*unaudited
Business review Risk and balance sheet management continued