RBS 2011 Annual Report Download - page 143

RBS Group 2011 141
Provisioning for retail customers
Within UK Retail and Ulster Bank, provisions are assessed in accordance
with the Group’s provisioning policies (refer to Impairment loss provision
methodology on pages 202 and 203). For the non-performing population,
acollective assessment is made. Within the performing book, latent loss
provisions are held for those losses that are incurred but not yet
identified.
The majority of mortgage accounts subject to forbearance in these
divisions remain in the performing book but are identified and monitored
separately from other performing accounts. They are subject to higher
provisioning rates than the remainder of the performing book (currently
approximately five times higher in UK Retail and approximately eight
times higher in Ulster Bank). These rates are reviewed quarterly in UK
Retail and monthly in Ulster Bank. Once forbearance is granted, the
account continues to be assessed separately for latent provisioning for 24
months (UK Retail only) or until the forbearance period expires. After that
point, the account is no longer separately identified for latent provisioning.
Non-performing mortgage accounts that have been granted forbearance
carry the same provision rate as non-forborne accounts.
In Citizens, the amount of recorded impairment depends upon whether
the loan is collateral dependent. If the loan is considered collateral
dependent, the excess of the loan’s carrying amount over the fair value of
the collateral is the impairment amount. If the loan is not deemed
collateral dependent, the excess of the loan’s carrying amount over the
present value of expected future cash flows is the impairment amount.
Credit risk mitigation
Introduction*
The Group employs a number of structures and techniques to mitigate
credit risk. Netting of debtor and creditor balances is undertaken in
accordance with relevant regulatory and internal policies. Exposure on
over-the-counter derivative and secured financing transactions is further
mitigated by the exchange of financial collateral and the use of market
standard documentation. Further mitigation may be undertaken in a
range of transactions, from retail mortgage lending to large wholesale
financing. This can include: structuring a security interest in a physical or
financial asset; use of credit derivatives, including credit default swaps,
credit-linked debt instruments and securitisation structures; and use of
guarantees and similar instruments (for example, credit insurance) from
related and third parties. Such techniques are used in the management of
credit portfolios, typically to mitigate credit concentrations in relation to an
individual obligor, a borrower group or a collection of related borrowers.
The use and approach to credit risk mitigation varies by product type,
customer and business strategy. Minimum standards applied across the
Group cover:
xThe suitability of qualifying credit risk mitigation types and any
conditions or restrictions applicable to those mitigants;
xThe means by which legal certainty is to be established, including
required documentation and all necessary steps required to
establish legal rights;
xAcceptable methodologies for initial and any subsequent valuations
of collateral and the frequency with which collateral is to be revalued
and the use of collateral haircuts;
xActions to be taken in the event that the value of mitigation falls
below required levels;
xManagement of the risk of correlation between changes in the credit
risk of the customer and the value of credit risk mitigation;
xManagement of concentration risks, for example, by setting
thresholds and controls on the acceptability of credit risk mitigants
and on lines of business that are characterised by a specific
collateral type or structure; and
xCollateral management to ensure that credit risk mitigation remains
legally effective and enforceable.
Collateral and other credit enhancements received
Within its secured portfolios, the Group has recourse to various types of
collateral and other credit enhancements to mitigate credit risk and
reduce the loss to the Group arising from the failure of a customer to
meet its obligations. These include: cash deposits; charges over
residential and commercial property, debt securities and equity shares;
and third-party guarantees. The existence of collateral may affect the
pricing of a facility and its regulatory capital requirement. When a
collateralised financial asset becomes impaired, the impairment charge
directly reflects the realisable value of collateral and any other credit
enhancements.