RBS 2012 Annual Report Download - page 144

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Business review Risk and balance sheet management continued
Liquidity risk continued
Contingency planning
The Group has a Contingency Funding Plan (CFP), which is updated as
the balance sheet evolves and forms the basis of analysis and actions to
remediate adverse circumstances as and if they arise. The CFP is linked
to stress test results and forms the foundation for liquidity risk limits. The
CFP provides a detailed description of the availability, size and timing of
all sources of contingent liquidity available to the Group in a stress event.
These are ranked in order of economic impact and effectiveness to meet
the anticipated stress requirement. The CFP includes documented
processes for actions that may be required to meet the outflows. Roles
and responsibilities for the effective implementation of the CFP are also
documented.
Liquidity reserves
Liquidity risks are mitigated by the Group’s centrally managed liquidity
buffer. The size of the reserve is an output from internal modelling and
the FSA’s ILG. The majority of the portfolio is held in the FSA regulated
UK Defined Liquidity Group (UK DLG) comprising the Group’s five UK
banks: The Royal Bank of Scotland plc, National Westminster Bank Plc,
Ulster Bank Limited, Coutts & Co and Adam & Company.
Certain of the Group's significant operating subsidiaries - RBS N.V., RBS
Citizens Financial Group Inc. (CFG) and Ulster Bank Ireland Limited -
hold locally managed portfolios of liquid assets that comply with local
regulations but may differ with FSA rules. These portfolios are the
responsibility of the local Treasurer who reports to the Group Treasurer.
The Group‘s liquidity buffer is managed by Group Treasury and is the
responsibility of the Group Treasurer. The liquidity buffer is ring-fenced
from the trading book within the Markets division. The liquidity buffer is
actively managed so as to balance its liquidity value relative to the margin
impact of maintaining a large and high quality investment portfolio. This is
in line with internal liquidity risk policy and appetite and regulatory
guidance. The portfolio is accounted for on an available-for-sale basis.
The value of the portfolio can move up and down based on a variety of
market movements. Gains can and will be taken through sales of
portfolios. Such sales and gains are part of normal portfolio management
and these gains can be used to offset costs in other parts of the Group.
The Group analyses its liquidity buffer including its locally managed
liquidity pools into primary and secondary liquidity groups.
The primary liquidity group generally reflects eligible liquid assets, such
as cash and balances at central banks, treasury bills and other high
quality government and agency bonds, and other local primary qualifying
liquid assets for each of the significant operating subsidiaries that
maintain a local liquidity pool.
Secondary liquidity assets represent other qualifying liquid assets that are
eligible for local central bank liquidity facilities but do not meet the core
local regulatory definition. For example, secondary liquid assets include
self-issued securitisations or covered bonds that are retained on balance
sheet and pre-positioned with a central bank so that they can be
converted into additional sources of liquidity at very short notice.
The Group in consultation with the FSA and subject to the requirements
of the FSA’s ILG can change the composition of its liquidity buffer. The
change in composition may relate to market specific factors, changes in
internal liquidity risk mix or regulatory guidance. This occurred in 2012
when the FSA agreed to recognise an increase in the amount of
secondary liquidity assets and a reduction in primary assets. Such a
change was made possible in conjunction with the introduction of the
Funding for Lending Scheme. The reduction in the balance of primary
assets was also beneficial to the Group’s margin.
Regulatory oversight
The Group operates in multiple jurisdictions and is subject to a number of
regulatory regimes.
The Group’s lead regulator is the UK Financial Services Authority (FSA).
The FSA implemented a new liquidity regime as documented in PS
09/16, on 1 June 2010. The new rules provide a standardised approach
applied to all UK banks and all building societies as well as branches and
subsidiaries of foreign financial firms. The rules focus on the UK DLG and
cover adequacy of liquidity resources, controls, stress testing and the
Individual Liquidity Adequacy Assessment.
In addition, in the US, the Group’s operations must meet liquidity
requirements set out by the US Federal Reserve Bank, the Office of the
Comptroller of the Currency, the Federal Deposit Insurance Corporation
and the Financial Industry Regulatory Authority. In the Netherlands, RBS
N.V. is subject to the De Nederlandsche Bank liquidity oversight regime.