RBS 2012 Annual Report Download - page 163

RBS GROUP 2012
161
Sector concentration
Across wholesale portfolios, exposures are assigned to, and reviewed in
the context of, a defined set of industry sectors. Through this sector
framework, risk appetite and portfolio strategies are agreed and set at
aggregate and more granular levels, where exposures have the potential
to represent excessive concentration or where trends in both external
factors and internal portfolio performance give cause for concern. Formal
periodic reviews are undertaken at Group or divisional level depending on
materiality. These may include an assessment of the Group’s franchise in
a particular sector, an analysis of the outlook (including downside
outcomes), identification of key vulnerabilities and stress/scenario tests.
The focus during 2012 was on embedding sector and sub-sector specific
appetite within divisional policies and processes and on setting
appropriate controls. This includes strengthening portfolio controls on key
metrics and lending parameters, and the ongoing development of sector-
specific lending policies.
As a result of the reviews carried out in 2012, the Group has reduced its
risk appetite in the most material corporate sectors of commercial real
estate and retail. For further details on sector-specific strategies,
exposure reduction and key credit risks, refer to pages 181 to 193.
Single-name concentration*
Within wholesale portfolios, much of the activity undertaken by the credit
risk function is organised around the assessment, approval and
management of the credit risk associated with a borrower or group of
related borrowers.
A formal single name concentration framework addresses the risk of
outsized exposure to a borrower or borrower group. The framework
includes specific and sometimes elevated approval requirements,
additional reporting and monitoring, and the requirement to develop plans
to address and reduce excess exposures over an appropriate timeframe.
Credit approval authority is discharged by way of a framework of
individual delegated authorities, which requires at least two individuals to
approve each credit decision, one from the business and one from the
credit risk management function. Both parties must hold sufficient
delegated authority. While both parties are accountable for the quality of
each decision taken, the credit risk management approver holds ultimate
sanctioning authority. The level of authority granted to individuals is
dependent on their experience and expertise, with only a small number of
senior executives holding the highest authority provided under the
framework.
At a minimum, credit relationships are reviewed and re-approved
annually. The renewal process addresses: borrower performance,
including reconfirmation or adjustment of risk parameter estimates; the
adequacy of security; and compliance with terms and conditions. For
certain counterparties, early warning indicators are also in place to detect
deteriorating trends in limit utilisation or account performance, and to
prompt additional oversight.
A number of credit risk mitigation techniques are available to reduce
single name concentrations. To be considered suitable, credit risk
mitigants must be effective in terms of legal certainty and enforceability
and maturity/expiry dates must be the same or later than the underlying
obligations. Typical mitigant types include, cash, bank/government
guarantees, and credit default swaps (CDS).
Since 2009, the Group has been managing its corporate exposures to
reduce concentrations and align its appetite for future business to the
Group’s broader strategies for its large corporate franchises. The Group
is continually reviewing its single name concentration framework to
ensure that it remains appropriate for current economic conditions and in
line with improvements in the Group’s risk measurement models.
In 2012, the Group implemented further refinements to the single name
exposure management controls already in place which allows the Group
to differentiate more consistently between the different product types.
Country
For information on how the Group manages credit risk by country, refer to
the Country risk section on pages 252 to 280.
Controls and assurance*
The Group’s credit control and assurance framework comprises three key
components: credit policy, policy compliance assurance and independent
assurance.
The foundation is the Group Credit Policy Standard, which, as part of the
Group Policy Framework (GPF) (refer to page 115), sets out the rules the
Group’s businesses must follow to ensure that credit risks are identified
and effectively managed through the credit lifecycle. During 2012, a
major revision of the Group’s key credit policies was completed ensuring
that the Group’s control environment is appropriately aligned to the risk
appetite that the Group Board has approved, and provides a sound basis
for the Group’s independent audit and assurance activities across the
credit risk function.
The second component is a policy assurance activity that GCR
undertakes to provide the Group Chief Credit Officer with evidence of the
effectiveness of the controls in place across the Group to manage credit
risk. The results of these reviews are presented to the Group Credit Risk
Committee on a regular basis in support of the self-certification that GCR
is obliged to complete under the GPF.
Finally, a strong independent assurance function is an important element
of a sound control environment. During 2011, the Group took the decision
to strengthen its credit quality assurance (CQA) activities and moved all
divisional CQA resources under the centralised management of GCR.
The benefits of this action are already apparent in greater consistency of
standards and cross-utilisation of resources, ensuring that subject matter
experts bring their expertise to bear where relevant.
Reviews undertaken consistently address the four underlying risk pillars
of: risk management, risk appetite, ratings and data integrity, and asset
quality. Appropriate identification, escalation, remediation and related
tracking of control breaches and improvements in operational processes
are firmly embedded in the assurance process to ensure that divisions
act upon review findings.
*unaudited