RBS 2011 Annual Report Download - page 136

134 RBS Group 2011
Business review Risk and balance sheet management continued
Risk management
Introduction
This section focuses on each of the key types of risk that RBS Group
faces - explaining how the Group manages these risks and highlighting
the enhancements made as a result of progress under the Group’s
ongoing initiatives to strengthen its approach to risk management.
Credit risk
All the disclosures in this section (pages 134 to 160) are audited unless
otherwise indicated by an asterisk (*).
Credit risk is the risk of financial loss owing to the failure of a customer to
meet its obligation to settle outstanding amounts. The quantum and
nature of credit risk assumed across the Group’s different businesses
vary considerably, while the overall credit risk outcome usually exhibits a
high degree of correlation with the macroeconomic environment.
Organisation
The existence of a strong credit risk management function is vital to
support the ongoing profitability of the Group. The potential for loss
through economic cycles is mitigated through the embedding of a robust
credit risk culture within the business units and through a focus on the
importance of sustainable lending practices. The role of the credit risk
management function is to own the credit approval, concentration and
credit risk control frameworks and to act as the ultimate authority for the
approval of credit. This, together with strong independent oversight and
challenge, enables the business to maintain a sound lending environment
within risk appetite.
Responsibility for development of Group-wide policies, credit risk
frameworks, Group-wide portfolio management and assessment of
provision adequacy, sits within the Group Credit Risk (GCR) function
under the management of the Group Chief Credit Officer. Execution of
these policies and frameworks is the responsibility of the risk
management functions, located within the Group’s business divisions.
These divisional credit risk functions work together with GCR to ensure
that the Group Board’s expressed risk appetite is met, within a clearly
defined and managed control environment. The credit risk function within
each division is managed by a Chief Credit Officer, who reports jointly to
adivisional Chief Risk Officer and to the Group Chief Credit Officer.
Divisional activities within credit risk include credit approval, transaction
and portfolio analysis, early problem recognition and ongoing credit risk
stewardship.
GCR is additionally responsible for verifying compliance by the divisions
with all Group credit policies.
In the final quarter of 2011, the Executive Risk Forum (ERF) approved a
change to the management of the credit portfolio, delegating greater
authority to the Group Chief Credit Officer as chair of the functional credit
committees that analyse and recommend the limits to the ERF. With
effect from October 2011, the Group Chief Credit Officer chairs a single
Credit Risk Committee, with the authority to approve limits for the majority
of portfolios across the Group. The ERF retains its strategic role as the
most senior risk committee outside the Group Board and will continue to
approve material portfolio concentrations and higher risk portfolios such
as commercial real estate. This change strengthens individual
accountability across the risk organisation and encourages the
engagement of business leaders in first line of defence risk activity.
Risk appetite
Credit concentration risk is managed and controlled through a series of
frameworks designed to limit concentration by product/asset class,
sector, single name and country. These are supported by a suite of
Group-wide and divisional policies, setting out the risk parameters within
which business units may operate. Information on the Group’s credit
portfolios is reported to the Group Board by way of the divisional and
Group-level risk committees.
Throughout 2011, GCR’s emphasis was on embedding the new risk
management frameworks introduced in 2009 and 2010 and on ensuring
alignment with the strategic risk objectives being pursued across the
Group. Risk appetite has been expressed by the Group Board by
reference to earnings volatility and stable capital and these principles
underpin the frameworks that GCR has established, and is continuing to
refine, to manage the Group’s concentration risks in the Core balance
sheet, by product/asset class, sector, single name and country.
In the two years since the new concentration framework was rolled out
across the Group, the ERF has reviewed all material industry and product
portfolios and agreed a risk appetite commensurate with the franchises
represented in these reviews. In particular, limits have been reviewed and
re-sized, to refine the Group’s risk appetite in areas where it faces
significant balance sheet concentrations or franchise challenges. The
product/asset class, sector, single name and country limits are now firmly
embedded in the risk management processes of the Group and form a
pivotal part of the Risk function’s engagement with the businesses on the
appropriateness of risk appetite choices.
The new sector and asset class limits have been informed by the work
undertaken to stress the portfolios and historical loss experience. In
addition, they factor in the future consequences for risk and return in
asset classes likely to be affected by the introduction of new regulatory
capital rules under Basel III.
*unaudited