RBS 2012 Annual Report Download - page 123

RBS GROUP 2012
121
Stress testing*
Stress testing describes the evaluation of a bank’s financial position
under severe but plausible stress scenarios. Stress testing also refers to
the broader framework under which these tests are developed, evaluated
and used within the Group’s decision-making process in the context of
the wider economic environment.
Internal stress tests
The Group’s stress testing framework is designed to embed stress testing
as a key risk management technique into mainstream risk reporting,
capital planning and business processes at divisional, legal entity and
Group levels.
The Executive Risk Forum (see Risk governance on page 119) is the
main body overseeing the Group's stress testing approach, processes
and results. The forum is primarily responsible for reviewing and
challenging the results of any Group-wide stress test and ensuring that,
where necessary, appropriate management actions are undertaken. The
Board Risk Committee receives reports detailing stress tests undertaken
as part of the financial planning process. It reviews and challenges the
stress scenarios and considers their impact on the Group's financial
position. These reports outline relevant management actions as well as
the extent to which such actions mitigate the effects of the stress
scenario on the Group’s capital adequacy. The Board Risk Committee
may also request additional stress tests as it deems necessary.
Stress testing forms part of the Group's risk and capital management
framework and is a major component of the Basel III requirements. It
highlights to senior management potential unexpected adverse outcomes
related to a mixture of risks and provides an indication of how much
capital might be required to absorb losses should adverse scenarios
materialise. Stress tests, part of the financial planning process are
conducted and presented to senior management semi-annually. Stress
tests are also conducted to meet regulatory requirements as well as to
assess the impact of business decisions on the Group's capital position.
Examples of the former include the European Banking Authority’s EU-
wide stress tests, the International Monetary Fund’s Financial Sector
Assessment Program and the UK Financial Services Authority’s anchor
stress tests while examples of the latter include stress tests conducted in
connection with the transfer of assets from The Royal Bank of Scotland
N.V. to The Royal Bank of Scotland plc.
Scenario stress testing is conducted throughout the Group as detailed
below:
x As part of the financial planning and strategy cycle, stress tests are
conducted by divisions and aggregated to produce firm-wide results.
These stress tests are also used for monitoring divisional and Group
risk appetite.
x Stress testing is performed centrally by Group functions both to
meet regulatory requirements and for ad-hoc business analysis and
decision-making. These stress tests also include reverse stress
tests, which identify scenarios and circumstances that could render
RBS’s business model unviable.
x Division-specific stress testing is undertaken to support risk
identification and risk management decision-making.
x Risk-type specific stress testing is also conducted. For example,
within the market risk management framework, a comprehensive
programme of stress tests covers a variety of historical and
hypothetical scenarios, including reverse stress tests.
Stress test scenarios specifically target both firm-wide vulnerabilities and
negative global impacts. They consider a five-year horizon and include
stress projections for macroeconomic variables such as GDP,
unemployment rates, property prices, stock price indices, interest rates
and inflation.
*unaudited