RBS 2012 Annual Report Download - page 117

RBS GROUP 2012
115
Creating sustainable value within risk appetite
Risk appetite supports value creation delivered in a safe and sustainable
way. It is embedded within the annual planning and budgeting process.
Business strategies are designed on the basis of key value drivers (e.g.
regulatory framework, customer franchises, internal control framework,
incentives) and whether they fit within agreed risk appetite boundaries.
A range of different but complementary tools have been developed to
measure whether strategic plans are consistent with risk appetite, to test
broader ‘what if’ questions and to assess the impact of changes in key
assumptions:
x Integrated stress testing - (refer to page 121) assesses how
earnings, capital and funding positions change under an
unfavourable, yet plausible, scenario. Stress scenarios can differ by
theme, geographical location or severity.
x Economic capital - provides complementary insights, with a breadth
of understanding of risk profile changes and ‘tail risks’ across
millions of different modelled scenarios.
x Sensitivity analysis - provides ‘ready reckoners’ around changes in
key variables. It offers a high-level view on questions such as ‘what
if GDP worsened by a further 1%?’, identifying certain tipping points
where the Group’s risk profile moves outside its risk appetite.
Effective processes for reporting the results have also been developed,
presenting the Board and senior management with a holistic and dynamic
view of key risk exposures.
Group Policy Framework*
Achieving and sustaining a robust control framework comparable to those
of the Group’s strongest international peers is critical to achieving the
successful delivery of the Group’s risk objectives.
The Group Policy Framework (GPF), introduced in 2009, supports this
goal by providing a consistent and structured overarching framework for
conduct, control and governance. It provides clear guidance and controls
on how the Group does business, linked to its risk appetite, its business
conduct and compliance responsibilities, and its focus on delivering a
control environment consistent with best practice against relevant
external benchmarks.
The GPF and related initiatives aim to ensure that:
x The Group has ethical principals and clear control standards to
identify the risks it faces to support effective risk management and
meet regulatory and legal requirements;
x Policies are followed across the Group and compliance can be
clearly evidenced, assessed and reported by line management;
x The control environment is monitored and overseen through good
governance.
Communication and training programmes ensure staff are aware of their
own responsibilities. Policy standard owners and sponsors review their
policies on a regular basis, documenting identified shortfalls and
addressing them within an agreed time frame.
In 2011, a number of key enhancements were delivered including the
following:
x The Group’s policy standards were rewritten to ensure they clearly
express the existing mandatory controls required to mitigate the key
risks the Group faces;
x All of the Group’s policy standards were externally benchmarked;
and
x For each policy standard, appropriate risk-based assurance activity
was introduced to ensure each division is appropriately controlled
and compliance with policy can be demonstrated.
During 2012, the scope of the GPF was refined further. Key
developments included:
x Following external benchmarking exercises, additional policy
standards were introduced setting out new mandatory controls
required to mitigate key risks to the Group.
x A conduct risk framework was agreed and is being progressively
established. Grouped under four policy standards - employee
conduct, corporate conduct, market conduct; and conduct towards
our customers - each is designed to provide high level direction to
the Group and is supported by the Group's Code of Conduct (refer
to page 347 for more detail).
x The Group’s key credit risk policies and mandatory controls were
restructured and realigned to reflect the two distinct portfolios of
credit risk: wholesale and retail. These changes are aimed at
simplifying the policy structure and making it clearer to divisions
which standards are applicable to their respective businesses.
x Certain procedural-related policy standards were removed from the
framework to reduce bureaucracy and simplify the structure.
The GPF continues to be improved. The results of assurance activity,
monitoring and analysis of the internal and external environment are used
to reassess the policy standards on a regular basis.
*unaudited