RBS 2012 Annual Report Download - page 116

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Business review Risk and balance sheet management continued
Risk appetite and risk governance
Risk appetite*
Risk appetite is both a key business tool and an integral part of RBS’s
enterprise-wide approach to risk management. It is aligned with the
Group’s strategic objectives, helping to strike an optimal balance between
building a sustainable risk profile and creating long-term value for the
Group’s customers, investors and wider stakeholders. The risk appetite
framework is designed to ensure that each business can withstand
significant deteriorations in economic and market conditions.
The Group’s risk appetite is set and owned by the Group Board. It
identifies and establishes the level and type of risks that RBS is able and
willing to take in order to:
x meet its strategic objectives - the Group’s Strategic Plan is built on
the core foundations of serving its customers well, building a
sustainable risk profile and creating long-term value for its
shareholders; and
x meet its wider obligations to stakeholders - a bank that is safe and
sound and puts serving customers at the heart of its thinking should
also perform well for its owners, employees, regulators and
communities.
Risk appetite is cascaded and embedded across the Group. It provides a
greater understanding of the acceptable levels of risk for each business,
aligning commercial strategies with the use of scarce financial resources,
such as capital and funding. It provides a solid platform from which RBS
can focus on its key business strengths and competitive advantages over
the long term.
Delivering a sustainable and conservative risk profile
Risk appetite starts with the tone from the top (i.e. the strategic goals and
risk philosophy set by the Group Board) and is cascaded through key
targets, limits and risk tolerances that influence decision making from
enterprise-wide to transactional level.
A strong risk culture is a key part of ensuring risk appetite is effectively
embedded across the Group. The link between risk appetite and strategic
objectives encourages people at all levels of the business to think about
risk, how they apply it and how they manage it. It incorporates the
quantitative and qualitative aspects of risk, and uses both absolute and
relative risk measures.
The risk appetite framework is based upon four main pillars:
x Risk envelope metrics - RBS has set sustainable business goals
over a medium-term horizon (refer to page 15, including a target for
the capital ratio, leverage ratio, loan:deposit ratio, liquidity portfolio
and use of wholesale funding. These effectively set the broad
boundaries within which the Group operates. The Non-Core division
also acts as a primary driver for reducing risk and the size of the
balance sheet.
x Quantitative risk appetite targets - Risk appetite is also aligned to
potential risk exposures and vulnerabilities under severe but
plausible stress conditions. Quantitative targets, under stress
conditions, are set around the Group’s strategic risk objectives (refer
to page 109).
x Qualitative risk appetite targets - The third strategic risk objective of
maintaining stakeholder confidence covers qualitative aspects
relating to the culture of risk management and controls and meeting
stakeholder expectations. Risk appetite is based around identified
expectations across a range of stakeholders (e.g. customers,
employees, investors and the general public) and is closely aligned
with key risk policies and controls (e.g. the Group Policy Framework,
conduct risk, reputational risk).
x Risk control frameworks and limits - Risk control frameworks set
granular tolerances and limits for material risk types (e.g. credit risk,
market risk, conduct risk and operational risk) that are used to
manage risk on a day-to-day basis. These limits support and are
required to be consistent with the high-level risk appetite targets.
The framework is supported by a programme of communication,
engagement and training rolled out across the Group to engender a wide
understanding of the purpose and value of an effective risk appetite.
The Group Policy Framework (see following section) directly supports the
qualitative aspects of risk appetite, helping to rebuild and maintain
stakeholder confidence in the Group’s risk control and governance. This
integrated approach ensures that an appropriate standard of control is set
for each of the material risks the Group faces, with an effective assurance
process put in place to monitor and report on performance.
Risk appetite has its own policy standard within the Group Policy
Framework that sets out clear roles and responsibilities to measure,
cascade and report performance against risk appetite, and to provide
assurances that business is being conducted within approved risk limits
and tolerances.
The Board Risk Committee reviews the framework and its targets on a
regular basis to ensure they remain aligned to strategic objectives,
business performance, emerging risks and changes in the external
environment.
Strategic Objectives
The strategic objectives are translated into high-level target measures that set the risk appetite boundaries
High Level
Risk Appetite
Strategic Risk
Envelope Targets
Quantitative Risk
Appetite Targets
Qualitative Risk
Appetite Targets
Granular tolerances and limits, consistent with the high level targets, are set and used to manage risk on a
day-to-day basis
Lower Level
Risk Appetite Credit Traded & Non Traded Market Operational Funding & Liquidity Conduct
Country Reputational Regulatory Business Pension
Risk Control Frameworks & Limits
*unaudited
Strategic Objectives
Quantitative Risk
Appetite Targets
The strategic objectives are translated into high-level target measures that set the
risk appetite boundaries
Strategic
Risk Envelope Targets
High Level
Risk Appetite
Credit
Granular tolerances and limits, consistent with the high-level targets, are set and
used to manage risk on a day-to-day basis
Qualitative
Risk Appetite Targets
Lower Level
Risk Appetite
Risk Control Frameworks & Limits
Traded & Non
Traded Market Operational Liquidity
& Funding Conduct
Country Reputational Regulatory Business Pension