RBS 2012 Annual Report Download - page 162

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Business review Risk and balance sheet management continued
Credit risk management framework
The Group has established an appropriate and comprehensive
framework for the management of credit risk that includes governance
structures, risk appetite and concentration frameworks, policies,
measurement and reporting tools and independent assurance.
In order to strengthen this framework and ensure consistent application
across the Group, during 2012 the GCR function launched a set of credit
control standards, to supplement the existing policy suite. These
standards address divisional governance and policy requirements and
reflect a set of behavioural, organisational and management norms that
drive a sound divisional control environment and embed a strong risk
culture.
Risk appetite and concentration risk management
Risk appetite has been expressed by the Group Board through the
setting of specific quantitative risk appetite targets under stress (refer to
page 121). Of particular relevance in the management of credit risk are
the targets for earnings volatility and capital adequacy. The Group’s
credit risk framework has therefore been designed around the factors that
influence the Group’s ability to meet these targets. These include the
limiting of excess credit risk concentrations by product/asset class,
industry sector, customer or counterparty (i.e. single name) and country
any of which could generate higher volatility under stress and, if not
adequately controlled, can undermine capital adequacy.
The frameworks are supported by a suite of Group-wide and divisional
policies that set out the risk parameters within which business units must
operate.
The management of concentration risk and associated limits are firmly
embedded in the risk management processes of the Group and form a
pivotal part of the Risk function’s engagement with the businesses on the
appropriateness of risk appetite choices. The ERF, or delegated
committee, has reviewed all material industry and product portfolios and
agreed a risk appetite commensurate with the franchises represented in
these reviews. In particular, limits have been reviewed and re-sized, to
refine the Group’s risk appetite in areas where it faces significant balance
sheet concentrations or franchise challenges. The need to control
concentrations must at all times be balanced against the need to ensure
sufficient capacity within credit limits to support customers of sound credit
quality, in particular within retail and small business customer segments.
During 2012, the credit risk function expanded the scope of its credit risk
appetite controls through the active management of non-financial risks in
the Group’s lending decisions. The development of Environmental, Social
and Ethical (ESE) risk policies for sectors considered to present a higher
reputational risk (such as the defence, oil and gas sectors) provide a
framework within which the Group can better manage its reputational
risks. This ESE framework forms part of a wider initiative by the Group to
improve reputational risk management and build trust with its
stakeholders (for more information on reputational risk management,
refer to page 291).
Product/asset class
x Retail - A formal framework establishes Group-level statements and
thresholds that are cascaded through all retail franchises in the
Group and to granular business lines. These include measures that
relate both to aggregate portfolios and to asset quality at origination,
which are tracked frequently to ensure consistency with Group
standards and appetite. This appetite setting and tracking then
informs the processes and parameters employed in origination
activities, which require a large volume of small-scale credit
decisions, particularly those involving an application for a new
product or a change in facilities on an existing product. The majority
of these decisions are based upon automated strategies utilising
credit and behaviour scoring techniques. Scores and strategies are
typically segmented by product, brand and other significant drivers
of credit risk. These scores and strategies are data driven and utilise
a wide range of credit information relating to the customer including,
where appropriate, information on the customer’s credit performance
across their existing account holdings both with the bank and with
other lenders. A small number of credit decisions are subject to
additional manual underwriting by authorised approvers in specialist
units. These include higher-value, more complex, small business
and personal unsecured transactions and some residential
mortgage applications.
x Wholesale - Formal policies, specialised tools and expertise, tailored
monitoring and reporting and, in certain cases, specific limits and
thresholds are deployed to address certain lines of business across
the Group, where the nature of credit risk incurred could represent a
concentration or a specific/heightened risk in some other form.
Those portfolios identified as potentially representing a
concentration or heightened risk are subject to formal governance,
including periodic review, at either Group or divisional level,
depending on materiality.