RBS 2012 Annual Report Download - page 22

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OUR BUSINESS AND OUR STRATEGY
Risk type Definition Features
Capital adequacy risk The risk that the Group has insufficient capital. Potential to disrupt the business model and stop normal functions
of the Group.
Potential to cause the Group to fail to meet the supervisory
requirements of regulators.
Significantly driven by credit risk losses.
Liquidity
and funding risk
The risk that the Group is unable to meet its financial
liabilities as they fall due.
Credit risk The risk that the Group will incur losses due to the
failure of a customer to meet its obligation to settle
outstanding amounts.
Loss characteristics vary materially across portfolios.
Significant link between losses and the macroeconomic
environment.
Can include concentration risk – the risk of loss due to the
concentration of credit risk to a specific product/asset class,
sector or counterparty.
Country risk The risk of material losses arising from significant
country-specific events.
Can arise from sovereign events, economic events,
political events, natural disasters or conflicts.
Potential to affect parts of the Group’s credit portfolio that
are directly or indirectly linked to the country in question.
Insurance risk The risk of financial loss through fluctuations in the
timing, frequency and/or severity of insured events,
relative to the expectations at the time of underwriting.
Frequent small losses which are material in aggregate.
Infrequent large material losses.
Market risk The risk arising from fluctuations in interest rates,
exchange rates, credit spreads, equity prices,
commodity prices, and risk-related factors such
as market volatilities.
Frequent small losses which are material in aggregate.
Infrequent large material losses due to stress events.
Operational risk The risk of loss resulting from inadequate or failed
processes or systems, from inappropriate human
actions, or from external events.
Frequent small losses.
Infrequent material losses.
Regulatory risk The risk arising from non-compliance with regulatory
requirements, regulatory change or regulators’
expectations.
Adverse impacts on strategy, capital structure, business models
and operational effectiveness.
Financial cost of adapting to changes in laws, rules and
regulations or of penalties for non-compliance.
Financial cost and reputational damage in respect of penalties for
non-compliance/breach of regulations.
Conduct risk The risk that the conduct of the Group and its staff
towards its customers, or within the markets in which
it operates, leads to reputational damage and/or
financial loss.
Arises from breaches of regulatory rules or laws by individual
employees or as a result of the Group’s retail or wholesale
market conduct.
It may also arise from the failure to meet customers’ or regulators’
expectations of the Group.
Non-compliance may result in regulator enforcement, adverse
publicity and financial penalties.
Reputational risk The risk of brand damage and/or financial loss due to
failure to meet stakeholders’ expectations of the Group.
Can arise from actions taken or not taken by the Group or
from its wider conduct, policies and practices.
Can be detrimental to the business in a number of ways, including
an inability to build or sustain customer relationships, low staff
morale, regulatory censure or reduced access to funding sources.
Business risk The risk of losses as a result of adverse variance
in the Group’s revenues and/or costs relative to its
business plan and strategy.
May be caused by internal factors such as volatility in pricing,
sales volumes and input costs, and/or by external factors such
as exposure to macroeconomic, regulatory and industry risks.
Pension risk The risk arising from the Group’s contractual liabilities
to or with respect to its defined benefit pension
schemes, as well as the risk that it will have to make
additional contributions to such schemes.
Funding position can be volatile due to the uncertainty
of future investment returns and the projected value of
schemes’ liabilities.
The main risk types facing the Group, which are covered by the risk appetite framework, are shown below: