RBS 2012 Annual Report Download - page 126

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Business review Risk and balance sheet management continued
Risk appetite and risk governance: Risk coverage* continued
Risk type Definition Features How the Group managed risk and the focus in 2012
Market risk The risk arising from
fluctuations in interest rates,
foreign currency, credit
spreads, equity prices,
commodity 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.
The majority of the Group’s
market risk exposure is in the
Markets, International Banking
and Non-Core divisions and
Group Treasury. The Group is
also exposed to market risk
through interest rate risk and
foreign exchange risk on its
non-trading activities in the
retail and commercial
businesses.
A comprehensive structure is in place aimed at ensuring the
Group does not exceed its qualitative and quantitative
tolerance for market risk.
The Group’s market risk policy statements set out its qualitative
tolerance for market risk. They define the governance,
responsibilities and requirements for the identification,
measurement, analysis, management and communication of
market risk arising from the Group’s trading and non-trading
investment activities.
The Group market risk limit framework expresses the Group’s
quantitative tolerance for market risk. The Group limit metrics
capture, in broad terms, the full range of market risk
exposures, ensuring the risk is appropriately defined and
communicated.
During 2012, the Group continued to reduce its risk exposures;
market risk limits were lowered accordingly. Average trading
VaR was £97 million, 8% lower than 2011, largely reflecting
asset sales in Non-Core and decreases in ABS trading
inventory in Markets.
Refer to pages 242 to 251.
Operational risk The risk of loss resulting from
inadequate or failed processes,
people, systems or from
external events.
Frequent small losses.
Infrequent significant losses.
The Group aims to manage operational risk to an acceptable
level by taking into account the cost of minimising the risk
against the resultant reduction in exposure.
During 2012, the Group continued to make good progress in
enhancing its operational risk framework and risk management
capabilities. Key areas of focus have included: embedding risk
assessments, increasing the coverage of the scenario analysis
portfolio, and improving statistical capital modelling capabilities.
Operational risk data have been enriched by the outputs from
these enhancements, resulting in a more complete view of the
Group’s operational risk profile and more informed risk appetite
decisions.
The level of operational risk remains high due to the scale of
change occurring across the Group (both structural and
regulatory), macroeconomic stresses (e.g. eurozone distress)
and other external threats such as e-crime. In June 2012 the
Group was affected by a technology incident as a result of
which the processing of certain customers accounts and
payments were subject to considerable delay.
Refer to pages 282 to 284.
*unaudited