RBS 2012 Annual Report Download - page 124

122
Business review Risk and balance sheet management continued
Risk appetite and risk governance continued
Risk coverage*
The main risk types faced by the Group are presented below, together with a summary of the key areas of focus and how the Group managed these
risks in 2012.
Risk type Definition Features How the Group managed risk and the focus in 2012
Capital adequacy
risk
The risk that the Group has
insufficient capital.
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.
Core Tier 1 ratio was 10.3%, a sixty basis point improvement on
2011 (excluding the effect of APS). This largely reflected
reduction in risk profile with risk-weighted assets (RWAs) down
by nearly 10%, principally in Non-Core due to disposals and run-
off and in Markets.
Refer to pages 127 to 136.
Liquidity and
funding
The risk that the Group is
unable to meet its financial
liabilities as they fall due.
The Group’s performance in 2012 represented a new benchmark
in the management of liquidity risk as the Group began operating
under normalised market practices for the management of
liquidity and funding risk despite a backdrop of continued market
uncertainty and certain Group-specific factors such as a
downgrade of the Group’s external credit rating.
The Group met or exceeded its medium term strategic funding
and liquidity targets by 2012 year end. This included a
loan:deposit ratio of 100%, short-term wholesale funding (STWF)
of £42 billion, representing 5% of funded assets (target: less than
10%) and £147 billion liquidity portfolio which covered STWF 3.5
times (target: greater than 1.5 times STWF).
Refer to pages 137 to 156.
Credit risk The risk that the Group will
incur losses owing to the
failure of a customer or
counterparty 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.
The Group manages credit risk based on a suite of credit
approval, risk concentration, early warning and problem
management frameworks and associated risk management
systems and tools.
With a view to strengthening its credit risk management
framework and ensuring consistent application across the Group,
during 2012 the Group Credit Risk function launched a set of
credit control standards with which divisions must comply, to
supplement the existing policy suite. These standards comprise
not only governance and policy but also behavioural,
organisational and management norms that determine how the
Group manages credit from origination to repayment.
During 2012, loan impairment charges were 27% lower than in
2011 despite continuing challenges in Ulster Bank Group (Core
and Non-Core) and commercial real estate portfolios. Credit risk
associated with legacy exposures continued to be reduced, with
a further 34% decline in Non-Core credit RWAs during the year.
The Group also continued to make progress in reducing key
credit concentration risks, with exposure to commercial real
estate declining 16% during 2012.
Refer to pages 157 to 241.
*unaudited