RBS 2011 Annual Report Download - page 20

18 RBS Group 2011
The main risk types facing the Group, which are covered by the risk appetite framework, are shown below
Risk type Definition Features
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.
Credit risk
(including counterparty risk)
The risk that the Group will incur losses due 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.
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.
Market risk The risk arising from changes in interest rates, exchange
rates, 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.
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 due to stress events.
Operational risk The risk of loss resulting from inadequate or failed
processes or systems, from inappropriate human actions,
or from external events.
Frequent small losses.
Infrequent material losses.
Compliance risk The risk arising from non-compliance with national and
international laws, rules and regulations.
Adverse impacts on strategy, capital, business models
and operational effectiveness.
Financial cost of adapting to changes in laws, rules
and regulations or of penalties for non-compliance.
Reputational risk The risk of brand damage arising from financial and non-
financial events due to failure to meet stakeholders’
expectations of the Group’s performance and behaviour.
Potential to put the entire business at risk. Otherwise,
could lead to negative publicity, loss of revenue, costly
litigation or a decline in the customer base.
Can arise from actions taken by the Group or a failure
to take action.
Business risk The risk of lower-than-expected revenues and/or higher-
than-expected operating costs.
Influenced by many factors such as pricing, sales
volume, input costs, regulations and market and
economic conditions.
Pension risk The risk that the Group will have to make additional
contributions to its defined benefit pension schemes.
Funding position can be volatile due to the uncertainty
of future investment returns and the projected value of
schemes’ liabilities.
Our business and our strategy
Our approach to risk management (continued)