RBS 2012 Annual Report Download - page 286

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Business Review risk and balance sheet management continued
Other risks: Operational risk* continued
Control environment certification
Control Environment Certification (CEC) is used by the Group Executive
management to review and assess its internal control framework. Senior
management are required to provide a twice-yearly assessment of the
robustness of the Group’s internal control environment including:
x compliance with the Group Policy Framework and key
divisional/functional policy standards;
x compliance with the requirements of the UK Corporate Governance
Code;
x effectiveness of the risk frameworks, culture and governance
structures of each division or function to help ensure the Group
operates within risk appetite; and
x reporting on the material risks for the business against appetite.
The CEC outcomes are reported at both the divisional risk and audit
committees and Group Audit Committee.
Operational risk metrics
Operational risk events (net loss greater than £10,000) by event category
All losses and recoveries associated with an event are reported based on
the date of each financial impact. A single event can have multiple losses
(or recoveries), which may take a period of time to crystallise. Losses and
recoveries will also have been booked during 2012 on events which
occurred or were identified in prior years.
Number of events
At 31 December 2012, two categories accounted for around 60% of all operational risk events: (i) clients, products and business practices; and (ii)
execution, delivery and process management. This proportion was unchanged from 31 December 2011.
Value of losses
At 31 December 2012, three categories continue to account for 98% of the losses, however technology and infrastructure failures have replaced fraud
as one of the primary loss categories. This reflects the value of losses and provisions associated with a major systems incident during 2012 (referred to
as the Group technology incident). The majority of the increase in losses associated with the clients, products and business practices event category are
the result of increased Payment Protection Insurance provisions, and new provisions in respect of Interest Rate Hedging Products and LIBOR.
A small number of operational risk events contribute a high percentage of the total losses. This is evidenced by the fact that in 2012 only 4% of
operational risk events had a value of £1 million or greater (2011 - 3%) but accounted for 97% of the overall losses (2011 - 91%).
Capital
The Group calculates the capital requirement for operational risk using the standardised approach. The capital requirements are as follows:
2012
£m
2011
£m
Operational risk minimum capital requirement 3,668 3,034
*unaudited
Clients, products and business practices
Execution, delivery and process management
Fraud
Technology and infrastructure failures
Other
2012
Clients, products and business practices
Execution, delivery and process management
Fraud
Other
2011
Clients, products and business practices
Execution, delivery and process management
Fraud
Technology and infrastructure failures
Other
2012
Clients, products and business practices
Execution, delivery and process management
Fraud
Other
2011
£921m
£138m
£73m £13m
£2.4bn
£101m
£70m
£172m £11m