RBS 2012 Annual Report Download - page 285

RBS GROUP 2012
283
Scenario analysis
Scenario analysis is used to assess the possible impact of extreme but
plausible operational risk loss events. It provides a forward-looking basis
for managing exposures beyond the Group's risk appetite. The
methodology provides a structured and consistent approach to scenario
scoping and measurement. During 2012, the portfolio of scenarios was
further enhanced to increase coverage of the material risks to which the
Group is exposed.
Scenario analysis is an important component in the operational risk
framework, providing senior management with valuable insight into
systemic risk that could significantly impact the Group’s financial
performance or reputation if these events were to occur. Using its
forward-looking nature, senior management cross-examines various risk
topics against a range of circumstances and assumptions, including
consideration of single points of failure.
Scenarios are run in a workshop environment, bringing business, risk and
control experts together, thereby ensuring that risk management is
approached holistically. They include Group-wide themes, which are led
by Group Operational Risk and allow the Group to assess the impacts of
pan-divisional risks and macroeconomic stresses (e.g. eurozone
distress).
Stress testing
The Group further refined its approach to assessing the impact of the
economic cycle on its operational risk losses by specifically assessing the
impact of the FSA's published Anchor II scenario, which describes a
series of country-specific shocks around the world on:
x expected levels of operational risk losses; and
x capital adequacy requirements for operational risk.
The impact of the FSA Anchor II scenario on the Group's operational risk
capital, as calculated under the standardised approach, was also
projected based on the outputs of the Group’s stress-testing exercises.
Operational risk impacts are also assessed based on additional economic
stress scenarios developed internally.
Capital model development
The Group has continued with the development of its statistical modelling
capability for operational risk based on the requirements set out under
the Basel II advanced measurement approach. The model considers
internal and external loss data as well as scenarios and business
environment and internal control factors. The primary use of the model
will be to contribute to the economic capital calculation and to help test
the Group’s capital adequacy requirement. Embedding of the model
outputs is continuing in 2013.
Management, monitoring and reporting
Issues management
The objective of the operational risk issues management framework is
the adoption of a consistent approach to the identification, capture,
classification, monitoring, closure and acceptance of operational risk
issues and associated actions across the Group.
This element of the operational risk framework continues to be enhanced
in areas such as analysis of common issues on an aggregated basis
across the Group to identify emerging trends and improvements to the
quality of data captured.
Event and loss data management
Event and loss data management covers the discovery, escalation,
capture, investigation, approval and closure, and reporting and analysis
of operational risk events and loss data. It also provides for clear, simple,
quick and consistent communication of operational risk events that meet
defined threshold criteria to those members of the Group’s senior
management and executives who need to know of these events.
The Group has continued to focus on the timely, accurate capture of
operational risk losses; the use of a single Group-wide repository; and the
escalation of material operational risk events. This has resulted in
enhanced completeness and accuracy of the Group’s internal loss data,
and transparency of operational risk events, which allows the Group to
manage its operational risk profile more effectively.
The event and loss data process will continue to evolve to keep apace
with changing regulatory and industry standards regarding the collection
of internal loss data.
Insurance
The Group purchases insurance to provide the business with financial
protection against specific losses and to comply with statutory or
contractual requirements. Insurance is used to help manage the Group’s
exposures, providing protection against financial loss once a risk has
crystallised.
Monitoring and reporting
Monitoring and reporting forms an integral part of all of the Group’s
operational risk management processes, which are designed to ensure
that risks and issues are identified, escalated and managed on a timely
basis. Exposures for each division are reported through monthly risk and
control reports, which provide detail on the risk exposures and action
plans.
Enhancements made during 2012 include single-source extraction and
publication of operational risk data across the Group, such as operational
risk events and losses. This has resulted in consistent and higher quality
information for the purposes of oversight, challenge and operational risk
management.