RBS 2013 Annual Report Download - page 231
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Business review Risk and balance sheet management
229
Risk management*
Product/asset class concentration framework
The Group manages certain lines of business where the nature of credit
risk assumed could result in a concentration or a heightened risk in some
other form. This includes specific credit risk types such as settlement or
wrong-way risk and products such as long-dated derivatives or
securitisations. These product and asset classes may require formal
policies and expertise as well as tailored monitoring and reporting
measures. In some cases specific limits and thresholds are deployed to
ensure that the credit risk inherent in these lines of business and
products is adequately controlled. Product and asset classes are
reviewed regularly. The reviews consider the risks inherent in each
product or asset class, the risk controls applied, monitoring and reporting
of the risk, the client base, and any emerging risks to ensure risk appetite
remains appropriate.
Sector concentration
Exposures are assigned to, and reviewed in the context of, a defined set
of industry sectors. Risk appetite and portfolio strategies are set at either
the sector or sub-sector level, depending on where exposures may result
in excessive concentration, or where trends in both external factors and
internal portfolio performance give cause for concern. Regular formal
reviews are undertaken at Group or divisional level depending on
materiality. Reviews may include an assessment of the Group’s franchise
in a particular sector, an analysis of the outlook, identification of key
vulnerabilities or stress testing.
As a result of the reviews carried out in 2013, the Group further reduced
its risk appetite in the corporate sectors of commercial real estate and
retail. For further details on sector-specific strategies, exposure reduction
and key credit risks, refer to pages 252 to 267.
Single name concentration
A single name concentration (SNC) framework addresses the risk of
outsized exposure to a borrower or borrower group. The framework
includes elevated approval authority, additional reporting and monitoring,
and the requirement for plans to address exposures in excess of appetite.
Several credit risk mitigation techniques are available to reduce single
name concentrations. If the Group decides that its exposure is too high, it
may decide to sell excess exposures. Alternatively, it may decide to take
additional security or guarantees such as cash, bank or government
guarantees or enter into credit default swaps. Credit risk mitigants must
be effective in terms of legal certainty and enforceability. In addition,
maturity or expiry dates must be the same, or later, than the underlying
obligations.
Aggregate SNC exposures remain outside of the Group’s longer-term
appetite. However, material reductions have been achieved since the
framework was introduced. This trend continued during the year, with a
21% decrease in the number of excesses since December 2012.
Country concentration
The country concentration framework is described in the Country risk
section on pages 341 to 353.
*unaudited
Retail
A product and asset class framework exists to control credit risk for retail
businesses. It sets limits that measure and control the asset quality of
each key business area, the portfolios in that business and the new
business being originated. The actual performance of each portfolio is
tracked relative to these limits and action taken where necessary.
Credit risk assessment
Wholesale
The credit risk function assesses, approves and manages the credit risk
associated with a borrower or group of related borrowers.
The GCCO has established a framework of individual delegated
authorities, which are set out in the Group Credit Risk Policy. The
framework requires at least two individuals to approve each credit
decision, one from the business and one from the credit risk function.
Both must hold appropriate delegated authority, which is dependent on
their experience and expertise. Only a small number of senior executives
hold the highest authority provided under the framework. While both
parties are accountable for the quality of each decision taken, the credit
risk approver holds ultimate sanctioning authority.
In all circumstances the risks associated with any proposal to provide,
increase, review or change the terms or conditions of credit facilities must
be assessed prior to a credit decision being made. Assessments of credit
risk must, at a minimum, specifically address the following elements:
• The amount, terms, tenor, structure, conditions, purpose and
appropriateness of all credit facilities;
• Compliance with applicable Group and/or divisional credit policies;
• The customer’s ability to meet obligations, based on an analysis of
financial information and a review of payment and covenant
compliance history;
• The source of repayment and the customer’s risk profile, including
sector analysis and sensitivity to economic and market
developments, and credit risk mitigation;
• Refinancing risk - that is the risk of loss arising from the failure of a
customer to settle an obligation on expiry of a facility through the
drawdown of another credit facility provided by the Group or by
another lender;
• Consideration of all other risks such as environmental, social and
ethical, regulatory and reputational risks; and
• The portfolio impact of the transaction, including the impact on any
credit risk concentration limits or agreed divisional risk appetite.
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; compliance with terms and conditions; and
refinancing risk.