RBS 2011 Annual Report Download - page 138

136 RBS Group 2011
Risk management: Credit risk continued
Risk appetite continued
Since 2009, the Group has been managing its corporate exposures to
reduce concentrations and align its appetite for future business to the
Group’s broader strategies for its large corporate franchises. In the last
quarter of 2011, the Group announced further refinements to the single
name exposure management controls already in place, which brings
them more closely in line with market best practice and which allows the
Group to differentiate more consistently between the different risk types.
These changes are expected to be implemented during the first quarter of
2012. The Group is continually reviewing its single name concentration
framework to ensure that it remains appropriate for current economic
conditions and in line with improvements in the Group’s risk
measurement models.
Reducing the risk arising from concentrations to single names remains a
key focus of management attention. Continued progress was made in
2011 and credit exposures in excess of single name concentration limits
were reduced by over 15% during the year. The challenges posed by
continued market illiquidity and the impact of negative credit migration
caused by the current economic environment are expected to continue
throughout 2012.
Country
For information on how the Group manages credit risk by country, refer to
the Country risk section on page 208.
Controls and assurance*
Astrong independent assurance function is an important element of a
sound control environment. During 2011, the Group took the decision to
strengthen its credit quality assurance (CQA) activities and moved all
divisional CQA resources under the centralised management of Group
Credit Risk. The benefits of this action are already apparent in greater
consistency of standards and cross utilisation of resources. Reviews
planned for 2012 will benefit from the availability of subject matter experts
across all material products and classes and an improved ability to track
control breaches and strengthen processes.
Work began in the second half of 2011 on a major revision of the Group’s
key credit policies. This will ensure that the Group’s control environment
is appropriately aligned to the risk appetite that the Group Board has
approved and provide a sound basis for the Group’s independent audit
and assurance activities across the credit risk function. The work is
expected to be concluded by the end of the second quarter of 2012.
The Group Credit Risk function launched an assurance process to
provide the Group Chief Credit Officer with additional evidence of the
effectiveness of the controls in place across the Group to manage risk.
The results of these reviews will be provided to the Executive Risk Forum
and to the Board Risk Committee on a regular basis in support of the self-
certification that Group Credit Risk is obliged to complete under the
Group Policy Framework (refer to Operational risk on page 236 to 239).
*unaudited
Problem debt management
The Group’s procedures for managing problem debts differ between
wholesale and retail customers, as discussed below.
Wholesale customers
The controls and processes for managing wholesale problem debts are
embedded within the divisions’ credit approval frameworks and form an
essential part of the ongoing credit assessment of customers. Any
necessary approvals will be required in accordance with the delegated
authority grid governing the extension of credit.
Early problem recognition
Each division has established Early Warning Indicators (EWIs) designed
to identify those performing exposures that require close attention due to
financial stress or heightened operational issues. Such identification may
also take place as part of the annual review cycle. EWIs vary from
division to division and comprise both internal parameters (e.g. account
level information) and external parameters (e.g. the share price of
publicly listed customers).
Customers identified through either the EWIs or annual review are
reviewed by portfolio management and/or credit officers within the
division, who determine whether or not the customer’s circumstances
warrant placing the exposure on the Watchlist process (detailed below).
Watchlist process*
There are three Watchlist ratings - amber, red and black - reflecting
progressively deteriorating conditions. Watchlist Amber loans are
performing loans where the counterparty or sector shows early signs of
potential stress or has other characteristics such that they warrant closer
monitoring. Watchlist Red loans are performing loans where indications
of the borrower’s declining creditworthiness are such that the exposure
requires active management, usually by the Global Restructuring Group
(GRG). Watchlist Black loans comprise risk elements in lending and
potential problem loans.
Once on the Watchlist process, customers come under heightened
scrutiny. The relationship strategy is reassessed by a forum of
experienced credit, portfolio management and remedial management
professionals within the division. In accordance with Group-wide policies,
anumber of mandatory actions will be taken, including a review of the
customer’s credit grade and facility security documentation. Other
appropriate corrective action is taken when circumstances emerge that
may affect the customer’s ability to service its debt. Such circumstances
include deteriorating trading performance, an imminent breach of
covenant, challenging macroeconomic conditions, a late payment or the
expectation of a missed payment.
For all Watchlist Red cases, the division is required to consult with the
GRG on whether the relationship should be transferred to the GRG (see
more on the GRG below). Relationships managed by the divisions tend to
be with companies operating in niche sectors such as airlines or products
such as securitisation special purpose vehicles. The divisions may also
manage those exposures when subject matter expertise is available in
the divisions rather than within the GRG.
Business review Risk and balance sheet management continued