RBS 2012 Annual Report Download - page 141

RBS GROUP 2012
139
Liquidity risk
The Group has in place a comprehensive set of policies to manage
liquidity risk that reflects internal risk appetite, best market practice and
complies with prevailing regulatory strictures. These policies have been
comprehensively updated since 2008 reflecting:
x the Group’s experiences in 2008 and 2009;
x the Group’s restructuring plan and revised risk appetite and
framework;
x regulatory developments and enhancements;
x ongoing instability in global financial markets; and
x more conservative expectations from the Group’s various
stakeholders.
These policies are designed to address three broad issues which ensure
that:
x the Group’s main legal entities maintain adequate liquidity resources
at all times to meet liabilities as and when they fall due;
x the Group maintains an adequate liquidity buffer appropriate to the
business activities of the Group and its risk profile; and
x the Group has in place robust strategies, policies, systems and
procedures for identifying, measuring, monitoring and managing
liquidity risk.
At its simplest, these policies and the governance and actions they
mandate, determine the sources of liquidity risk and the steps the Group
can take when these risks exceed certain tolerances which are actively
monitored. These include not only when and how to use the Group’s
liquidity buffer but also what other adjustments to the Group’s balance
sheet could be undertaken to manage these risks within Group appetite.
These policies are reviewed at least annually or sooner if the Group’s
own liquidity position changes or if market conditions and/or regulatory
rules warrant further amendment or refinement.
During 2012, the Group’s liquidity risk management was tested by two
different events, the lowering of the Group’s credit rating and the
technology incident. These two events highlight the variety of
circumstances and events through which liquidity risk can materialise.
In the case of the credit rating downgrade by Moody’s, the Group was
given adequate notice to plan for such an outcome and challenge
Moody’s analytical approach. Potential or actual changes in the Group’s
or any of its subsidiaries ratings prompt an intensive internal review of the
likelihood and magnitude of such an outcome on customer and
counterparty behaviours. These include stress testing and scenario
modelling. This analysis was reviewed internally and shared with the
FSA. As a precautionary measure the Group increased the size of its
liquidity buffer in the period leading up the conclusion of the rating review.
Such actions proved unnecessary once Moody’s concluded their rating
review as there was very limited impact on customer or counterparty
behaviour.
Conversely, the technology event could not be foreseen and whilst similar
steps to understand the full impact needed to be taken, the process was
performed under a vastly compacted timeframe. Both events have
demonstrated the considerable progress the Group has made in
addressing the sources of liquidity risk and mitigating any impacts, real or
reputational.
Policy, framework and governance
Governance
The Group has in place a robust and comprehensive set of policies and
procedures for assessing, measuring and controlling the liquidity risk
within the Group. This ensures that the Group always maintain sufficient
eligible and appropriate financial resources to meet its forward looking
financial commitments as they fall due.
The Group’s appetite for liquidity risk is set by the Board and then
managed by various functions within the business. For example,
measurement of the Group’s liquidity risk is managed on a daily basis
within Group Finance, policy compliance and development is managed
within the Group Risk framework.
In setting risk limits the Board takes into account the nature of the
Group’s various activities, the Groups overall risk appetite, market best
practice and regulatory compliance.
Analogous provisions and requirements exist for each member of the
Group, who must comply with both internal standards and local regulatory
frameworks for the different jurisdictions in which they operate.
The Group’s principal regulator, the FSA, has a comprehensive set of
liquidity policies the cornerstone of which is Policy Statement (PS) 09/16.
In order to comply with the FSA regulatory process, the Group:
x Must complete and keep updated an Individual Liquidity Adequacy
Assessment (ILAA);
x Submit itself to the Supervisory Liquidity Review Process which is a
review of the ILAA and the Group’s liquidity policies and operational
capacity and capability; and
x This in turn leads to the Group and the FSA agreeing the
parameters of Group’s Individual Liquidity Guidance (ILG). Which
influences the overall size of the Group’s liquidity buffer.