RBS 2012 Annual Report Download - page 128

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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
Reputational risk The risk of brand damage
and/or financial loss due to the
failure to meet stakeholders’
expectations of the Group.
Can arise from a range of
actions taken (or, in some
cases, not taken) by the Group,
as well as its wider policies and
practices.
Can be detrimental to the
business in a number of ways,
including an inability to build or
sustain customer relationships,
low staff morale, regulatory
censure, or reduced access to
funding sources.
The Group Board has ultimate responsibility for managing the
Group's reputation, although all parts of the Group have
responsibility for any reputational impact arising from their
operations. The Board's oversight is supported by executive
risk committees (including a new Conduct Risk Committee)
and by the Group Sustainability Committee.
In 2012, the Group strengthened the alignment of reputational
risk management with its strategic objective of serving
customers well and with the management of a range of risk
types that have a reputational sensitivity. There are still legacy
reputational issues to work through, but dealing with them in
an open and direct manner is a necessary prerequisite to
rebuilding a strong reputation for the Group.
Refer to page 291.
Business risk The risk of losses as a result of
adverse variance in the
Group’s revenues and/or costs
relative to its business plan and
strategy.
May be caused by internal
factors such as volatility in
pricing, sales volumes and input
costs, and/or by external factors
such as exposure to
macroeconomic, regulatory and
industry risks.
Influenced by other risks the
Group faces that may contribute
to adverse changes in revenues
and/or costs, were these risks to
crystallise.
The Group seeks to minimise its exposure to business risk,
subject to its wider strategic objectives. Business risk is
identified, measured and managed through the Group’s
planning cycles and performance management processes.
The Group operates a rolling forecast process which identifies
projected changes in, or risks to, operating profit and ensures
appropriate action is taken.
The management of business risk lies primarily with divisions,
with oversight at the Group level led by Finance.
During 2012, the Group continued to de-risk its balance sheet
and to shrink its more volatile Markets business. The Group
has further enhanced its scenario modelling to better
understand potential threats to earnings, and to develop
appropriate contingency plans.
Refer to page 291.
Pension risk The risk arising from the
Group’s contractual liabilities to
or with respect to its defined
benefit pension schemes, as
well as the risk that it will have
to make additional
contributions to such schemes.
Funding position can be volatile
due to the uncertainty of future
investment returns and the
projected value of schemes’
liabilities.
The Group manages the risk it faces as a sponsor of its
defined benefit pension schemes using a framework that
encompasses risk reporting and monitoring, stress testing,
modelling and an associated governance structure. This helps
ensure the Group is able to fulfil its obligation to support the
defined benefit pension schemes to which it has exposure.
In 2012, the Group focused on enhancing its pension risk
management and modelling systems and implementing a
Group pension risk policy standard.
Refer to pages 292 and 293.
Each risk type maps into the Group’s risk appetite framework and contributes to the overall achievement of its strategic objectives with underlying
frameworks and limits. The key frameworks and developments over the past year are described in the relevant sections of the following pages.
RBS GROUP 2012
*unaudited