RBS 2012 Annual Report Download - page 161

RBS GROUP 2012
159
Shipping
The downturn observed in the shipping sector since 2008 has continued,
with an oversupply of vessels leading to lower asset prices and charter
rates. The Group has continued to manage exposures within this portfolio
intensively, with an increasing number of customers managed under the
Group’s Watchlist process (see page 172 for a description of this
process). The financed fleet comprises modern vessels with experienced
operators and despite the difficult market conditions impairments to date
have remained low. However, impairment levels remain vulnerable to a
continuing underperforming market.
Further details on the Group’s shipping portfolio can be found on page
166.
Retailers
Given the cyclical nature of the retail corporate sector and its sensitivity to
stressed economic conditions, the Group has continued to apply
heightened scrutiny to this portfolio. Despite some high-profile failures of
UK high street retailers, loss experience on the RBS retail portfolio
remained low during 2012 as a result of active management. The
portfolio is generally well diversified by geography and by counterparty.
Central counterparties (CCPs)
New regulation requiring greater use of CCPs for clearing over-the-
counter derivatives across the industry is aimed at reducing systemic risk
in the banking sector. RBS welcomes this move but recognises that the
Group’s concentration risk to CCPs will rise; thus exchanging
concentration risk to individual counterparties for concentration risk to
CCPs. CCPs are vulnerable to a significant member default, fraud and
increased operational risk if their infrastructure and collateral
management approaches are not developed commensurate with
increased activity they undertake.
In response to this industry change, the Group has developed a tailored
risk appetite and risk control framework. The Group’s central counterparty
exposure is dominated by a small number of well-established, high
quality and reputable clearing houses.
Renegotiations and forbearance
Loan modifications take place in a variety of circumstances including but
not limited to a customer’s current or potential credit deterioration. Where
the contractual payment terms of a loan have been changed because of
the customer’s financial difficulties, it is classified as ‘renegotiated’ in the
wholesale portfolio and as ‘forbearance’ in the retail portfolio.
RBS uses renegotiations and forbearance as management tools to
support viable customers through difficult financial periods in their lives or
during business cycles. Used wisely, they can reduce the incidence of
personal insolvency, as well as bankruptcies for otherwise successful
enterprises. On a broader scale they can also help reduce the impact of
“fire sale” pricing on real economic assets. However, they must be used
selectively and require additional management vigilance throughout the
loan life cycle. The Group has continued to take steps to improve its
management and reporting of such loans within both corporate and retail
businesses. More details of the Group’s approach can be found on pages
173 to 180.
Objectives, organisation and governance
The existence of a strong credit risk management function is vital to
support the ongoing profitability of the Group. The potential for loss
through economic cycles is mitigated through the embedding of a robust
credit risk culture within the business units and through a focus on the
importance of sustainable lending practices. The role of the RBS credit
risk management function is to own the credit approval, concentration
and credit risk control frameworks and to act as the ultimate authority for
the approval of credit. This, together with strong independent oversight
and challenge, enables the business to maintain a sound lending
environment within approved risk appetite.
Responsibility for development of, and compliance with, Group-wide
policies and credit risk frameworks and Group-wide assessment of
provision adequacy resides with the Group Credit Risk (GCR) function
under the management of the Group Chief Credit Officer. Execution of
these policies and frameworks is the responsibility of the risk
management functions, located within the Group’s business divisions.
The divisional credit risk management functions work together with GCR
to ensure that the risk appetite set by the Group Board is met, within a
clearly defined and managed control environment. The credit risk function
within each division is managed by a Chief Credit Officer, who reports
jointly to a divisional Chief Risk Officer and to the Group Chief Credit
Officer. Divisional activities within credit risk include credit approval,
transaction and portfolio analysis, ongoing credit risk stewardship, and
early problem recognition and management.
Material aspects of the Group’s credit risk management framework, such
as credit risk appetite and limits for portfolios of strategic significance, are
considered and approved by the Executive Risk Forum (ERF). The ERF
has delegated approval authority to the Group Credit Risk Committee, a
functional sub-committee of the Group Risk Committee, to act on credit
risk matters. These include, but are not limited to, credit risk appetite and
limits (within the overall risk appetite set by the Board and the ERF),
credit risk strategy and frameworks, credit risk policy and the oversight of
the credit profile across the Group.
The Group Credit Risk Committee is chaired by the Group Chief Credit
Officer and has representation from each of the Group’s divisional credit
risk functions. Monthly updates are provided to the Group Risk
Committee on key matters approved under delegated authority by the
Group Credit Risk Committee, performance against limits, and emerging
issues, to enable it to fulfil its role as an oversight committee.
Oversight of the Group’s provision adequacy is provided by the Group
Audit Committee.
Key trends in the credit risk profile of the Group, performance against
limits and emerging risks are set out in the RBS Risk Management
Monthly Report provided to the Group Board, the Executive Committee
and the Board Risk Committee.